Insights from Winston & Strawn
Securities and Exchange Commission – Cybersecurity Update
On September 15, 2015, the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) provided additional guidance regarding its Cybersecurity Examination Initiative (the Initiative) in the form of a second Risk Alert focusing on cybersecurity.
As you may recall, OCIE issued its initial cybersecurity Risk Alert on April 15, 2014, putting the industry on notice that cybersecurity and protection of customer data would be an area of concern during SEC examinations. OCIE conducted a study of cybersecurity preparedness among its regulated entities that was published on February 3, 2015. The SEC then put out an Investment Management Guidance Update in April 2015 on cybersecurity guidance. The SEC staff has indicated, in various statements, that additional guidance would be forthcoming and that enforcement actions should be expected.
Second Cybersecurity Risk Alert and Examination Focus
The SEC’s 2015 Exam Priorities publication identified cybersecurity as an area of focus. The Initiative provides additional information on where OCIE will focus its efforts in this regard and the type of testing to be conducted in the second round of cybersecurity examinations.
OCIE’s new Initiative will focus on six principal areas within a firm: (i) governance and risk assessment; (ii) access rights and controls; (iii) data loss prevention; (iv) vendor management; (v) training; and (vi) incident response. The Initiative release includes an appendix that provides a sample request for documentation or evidence to satisfy the SEC’s review of each focus area. Below is a summary of what the SEC will look for in each focus area.
Governance and Risk Assessment
When examining a firm’s governance and risk assessment compliance, the SEC will review current cybersecurity policies and procedures for protecting client information and security patches. Board materials and records regarding cybersecurity risks, incident response planning and third-party vendors will also be subject to review. Further, they will examine details on the Chief Information Security Officer and any other employees responsible for cybersecurity.
Access Rights and Controls
One of the main areas of concern for the SEC is how and who can access personally identifiable information at the firm. Accordingly, examiners will request policies and procedures relating to access to firm networks and devices and unauthorized access as well as changing access rights depending on employee status or role, and how employees gain external access to information (encryption of firm devices, remote monitoring, etc.). Additionally, the SEC will review user authentication procedures and how log-in attempts are controlled. Reinforcing the SEC’s earlier actions regarding verification of electronic requests to transfer funds, examiners will review verification policies and procedures when customers request fund transfers electronically.
Data Loss Prevention
The SEC will examine policies and procedures related to the systems used to prevent, detect, and monitor data loss related to personally identifiable information and access to customer accounts. Examiners will also review how distribution of sensitive information outside of the firm is controlled and monitored.
The SEC understands that not all firms can take on the technological side of data protection functions in-house and will often rely on vendors. Therefore, the SEC will request information on how third-party vendors are assessed and selected, and the policies of a firm’s vendors that are intended to provide data protection.
SEC examiners will request information regarding a firm’s cybersecurity training program and how such training programs are conducted by the firm and third-party vendors.
Perhaps the area which could cause the most issues for firms in an exam is their incident response plans and resolutions of past breaches. The SEC will examine business continuity plans that address mitigating cybersecurity incidents, incident response plan and tests conducted, and information regarding incidents of cybersecurity breaches or potential breaches and the remediation efforts taken.
Firms should be aware that the SEC expects to examine these materials in the immediate future. Accordingly, firms should be prepared to provide such information and have all necessary policies and procedures in place before examiners arrive.
SEC Cybersecurity-Related Enforcement Action
As anticipated, on September 22, 2015, the SEC announced the settlement of charges against a St. Louis based investment adviser for failing to adopt sufficient cybersecurity policies and procedures before a security breach. The SEC investigation found that R.T. Jones Capital Equities Management (R.T. Jones) violated this “safeguards rule” during a period of approximately four years when it failed to adopt any written policies and procedures to ensure the security and confidentiality of personally identifiable information and protect it from anticipated threats or unauthorized access. This failure to safeguard such information compromised the personal information of thousands of the firm’s clients. The SEC found that the firm had failed entirely to adopt written policies and procedures reasonably designed to safeguard customer information, as they are required by law to do. According to the SEC, R.T. Jones had failed to conduct periodic risk assessments, implement a firewall, encrypt personally identifiable information stored on its server, or maintain a response plan for cybersecurity incidents.
The SEC alleged that after R.T. Jones discovered the breach, the firm promptly retained multiple cybersecurity consulting firms to confirm the attack and determine the scope. Subsequent to the attack, R.T. Jones provided notice of the breach to every individual whose personal information may have been compromised and offered free identity theft monitoring through a third-party provider. Although the firm did not find evidence that any client suffered an economic harm as a result of the breach, the SEC nonetheless found that R.T. Jones violated Rule 30(a) of Regulation S-P, and without admitting or denying the findings, R.T. Jones agreed to cease and desist from committing or causing any future violations of Rule 30(a) of Regulation S-P, agreed to be censured, and to pay a $75,000 penalty.
On September 22, 2015, the SEC published an Investor Alert entitled “Identity Theft, Data Breaches and Your Investment Accounts.” While this is intended as an educational tool for investors and not industry guidance, it is further evidence that the SEC is acutely focused on the cybersecurity dangers facing the investing community.
Feature: SEC Proposes Liquidity Risk Management Rules for Open-Ended Funds
On September 21st, the Wall Street Journal published the results of its analysis of large bond mutual funds, noting that many of these funds have at least 15 percent of their money invested in illiquid securities, contrary to Securities and Exchange Commission (“SEC”) guidelines. The article noted that the SEC’s recommended threshold of 15 percent was established decades ago and remained a guideline, rather than a rule. On September 22nd, the SEC took steps to remedy this regulatory gap by issuing proposed rules that would establish liquidity risk management protocols for open-ended funds, including mutual funds and exchange-traded funds (“ETFs”). In addition to codifying current SEC guidelines limiting illiquid assets to 15 percent of a fund’s investments, the SEC’s proposal would implement additional measures to address concerns surrounding the potential harm to investors posed by the mass redemption of shares in funds that are heavily invested in illiquid assets.
The proposed rules require mutual funds and ETFs to establish liquidity risk management programs subject to certain requirements. Under the proposal, these funds would be required to classify their portfolio assets according to liquidity categories based on the number of days in which the assets would be convertible to cash without materially affecting the value of the assets prior to sale. A fund’s classification of its assets under these liquidity categories would be subject to disclosure requirements. Additionally, funds would be subject to a three-day liquid asset minimum, which would require funds to determine and disclose the minimum percentage of their net assets that must be convertible to cash within three business days at a price that does not materially affect the assets’ value directly prior to the sale. Funds would also be required to review their liquidity risk periodically, assessing the risk that they could not fulfill redemption requests under normal or stressed conditions without materially affecting the fund’s net asset value (“NAV”). The liquidity risk management program established by a fund would be subject to approval and periodic review by the fund’s board.
A key component of the proposal is the proposed amendments to Investment Company Act Rule 22c-1, which would allow open-ended funds, aside from money market funds and ETFs, the option to use “swing pricing.” The swing pricing proposal seeks to shelter fund shareholders from the potential dilution of the fund’s NAV caused by the trading activity of those purchasing and redeeming shares. Funds electing to use swing pricing would be required to develop policies to determine the amount to include in their NAV once trading activity exceeds a specified percentage of NAV. The proposed amendments establish specific guidelines for funds to follow in determining their swing pricing policies and swing threshold, require funds to obtain board approval of their swing pricing policies and procedures, and require funds to review their swing threshold annually. SEC Press Release and Fact Sheet. See also “Liquidity and Flows of U.S. Mutual Funds,” a white paper prepared by the Division of Economic and Risk Analysis staff, which was published alongside the SEC’s proposed rule.
The SEC Commissioners voted unanimously in favor of the proposed rules and amendments. Commissioner Gallagher applauded the proposal as an example of the SEC’s renewed focus on its “core responsibilities,” and particularly approved of the proposal’s scaled compliance period for smaller funds and extended comment period. Gallagher, however, raised concerns regarding the three-day liquid asset minimum and the use of swing pricing. Gallagher objected to the three-day liquid asset minimum as a “one-size-fits-all” approach, noting that while all funds are statutorily required under the Investment Company Act to pay for redeemed shares within seven days, only some are subject to the three-day redemption requirements under Rule 15c6-1 of the Securities Exchange Act. Still others, he noted, are structured to make all shares redeemable in three days, rendering the requirement devoid of “functional value.” Gallagher speculated regarding the potential harm of swing pricing to the retail investor who may unwittingly become subject to swing pricing costs triggered by a large institutional investor’s trading activity. Gallagher Statement. Commissioner Piwowar also objected to the three-day liquid asset minimum and the use of swing pricing, arguing that the liquid asset minimum should conform to the seven day statutory requirement under the Investment Company Act and the use of swing pricing may introduce the potential for shareholder gaming behavior and increase the volatility of a fund’s NAV. Piwowar Statement.
The SEC is seeking public comment on the proposal; comments should be submitted within 90 days of publication in the Federal Register, which is expected shortly. Since the disclosure requirements under the proposed rule necessitate changes to previously proposed forms, the SEC is reopening the comment period for the Investment Company Reporting Modernization rule proposed on May 20, 2015.
Banking Agency Developments
FFIEC Publishes 2014 Mortgage Loan Data
On September 23rd, the Federal Financial Institutions Examination Council (“FFIEC”) published data on 2014 mortgage lending transactions at U.S. financial institutions covered by the Home Mortgage Disclosure Act. The data includes disclosure statements for each financial institution, nationwide summary statistics on lending patterns, and Loan/Application Registers for each financial institution. FFIEC Press Release.
FRB Approves Changes to ACH Service
On September 23rd, the Federal Reserve Board (“FRB”) announced it had approved improvements to the Federal Reserve Banks’ automated clearing house (“ACH”) service. The changes will require all receiving depository financial institutions to participate in the service and originating depository financial institutions to pay a fee to receiving institutions for each same-day ACH transaction. The changes will become effective on September 23, 2016. FRB Press Release.
FRB Announces Members of the New Community Advisory Council
On September 22nd, the FRB announced the members of the Community Advisory Council (“CAC”). The CAC is a newly formed advisory group that will inform, advise, and make recommendations to the FRB regarding policy matters and other emerging areas of interest involving consumer and community development issues. FRB Press Release.
OCC Publishes Quarterly Report on Bank Trading and Derivatives
On September 21st, the Office of the Comptroller of the Currency (“OCC”) released its second quarter report regarding bank trading and derivatives activities. The report noted that trading revenue for U.S. commercial banks and savings institutions declined by 28 percent from the first quarter and by 14 percent in comparison to the second quarter last year. The report noted declines in trading revenue from interest rate and foreign exchange products, credit exposures from derivatives, and the notational amount of derivatives held by insured U.S. commercial banks. The OCC noted that the seasonal aspect of bank trading revenue accounts for many of the declines reported. OCC Press Release.
Treasury Department Developments
FPB Finalizes Changes to Mortgage Rules Affecting Small Creditors and Rural Creditors
On September 21st, the Consumer Financial Protection Board (“CFPB”) issued a final rule that implements changes to its mortgage rules in order to increase access to credit in rural and underserved areas. The rule changes will apply to small creditors generally as well as those operating specifically in rural and underserved areas. Among other things, the final rule will expand the definition of “small creditor” and “rural” areas, provide grace periods for small creditor and rural and underserved creditor status, create a one-year qualifying period for rural and underserved creditor status, and provide additional time for small creditors to implement changes to balloon payment mortgage transaction practices. The final rule will become effective on January 1, 2016. CFPB Press Release.
CFPB Appoints New Members to Advisory Boards
On September 18th, the CFPB announced the appointment of new members to three advisory boards that counsel agency leadership regarding a variety of consumer financial issues and emerging market trends: the Consumer Advisory Board, the Community Bank Advisory Council, and the Credit Union Advisory Council. CFPB Press Release.
Securities and Exchange Commission
SEC Proposes Amendments to its Rules for Administrative Proceedings
On September 24th, the SEC published for comment proposed amendments to the rules governing its administrative proceedings in an effort to modernize its rules of practice. The proposals include three primary changes to the Commission’s Rules of Practice that would adjust the timing of administrative proceedings, including by extending the time before a hearing occurs in appropriate cases; permit parties to take depositions of witnesses as part of discovery; and require parties in administrative proceedings to submit filings and serve each other electronically, and to redact certain sensitive personal information from those filings. The proposals also make certain other clarifying and conforming changes concerning deposition procedures; simplify the requirements for seeking Commission review of an initial decision; and provide enhanced transparency into the timing of the Commission’s decisions in such appeals. Comments should be submitted within 60 days after publication in the Federal Register, which is expected shortly. SEC Release No. 34-75976; SEC Release No. 34-75977; SEC Press Release.
Volcker Rule Guidance
On September 25th, the federal financial regulators published new guidance concerning the implementation of the Volcker rule, the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibiting proprietary trading. The guidance addresses a banking entity’s compliance program for market making-related activities and the submission of the annual CEO certification for prime brokerage transactions. See, e.g., CFTC Guidance. See also SEC Volcker Rule FAQs (containing all SEC staff guidance on the Volcker rule).
EDGAR Filing Guides
Exemptive and No-Action Relief
Venture Capital Funds.
On September 21st, the SEC granted a request for no-action relief if a firm relied on the exemption from registration as an investment adviser under Section 203(l) of the Investment Advisers Act and the definition of "venture capital fund" in Rule 203(l)-1 thereunder. The relief responds to an apparent unintended consequence of a literal interpretation of the Rule. No-Action Letter.
Tender Offer Exemptions Granted to Harmonize U.S. and Taiwanese Securities Laws
On September 17th, the Division of Corporation Finance granted exemptions from Section 14(d)(6) of the Securities Exchange Act of 1934 and Rule 14d-8 thereunder to allow Advanced Semiconductor Engineering, Inc.’s request to include in its unsolicited tender offer of Siliconware Precision Industries Co., Ltd., an Odd-Lot Provision in the offer to be made in the Republic of China but not in the offer to be made in the U.S. The relief is being granted in order to harmonize the conflicting requirements of U.S. and Taiwanese securities laws.Exemptive Letter.
On September 25th, Investment News summarized the results of a study conducted by an Emory University law professor. Professor Urska Velikonja analyzed the SEC’s enforcement statistics and found evidence which suggests that the agency inflates its enforcement figures. Cooked Books.
The SEC has posted the agenda for its September 29, 2015 conference marking the 75th anniversary of the Investment Company Act and the Investment Advisers Act.
SEC Launches New Rulemaking Website
On September 24th, SEC Chair Mary Jo White announced the availability of a new website, Rulemaking Index, listing the agency’s rulemaking activity since 2008. The site allows users to view proposed rules, final rules, and other actions related to a particular rulemaking. The index omits certain technical rulemakings, including updates to the EDGAR filing manual. White Statement.
Money Market Fund Statistics
On September 24th, the SEC published money market fund data as of August 31, 2015. MMF Statistics.
Advisory Committee on Small and Emerging Companies Renewed
On September 23rd, the SEC announced the renewal of its Advisory Committee on Small and Emerging Companies, which will continue to focus on interests and priorities of small businesses and smaller public companies. SEC Press Release.
Advisory Committee on Small and Emerging Companies Documents
The SEC has posted the following documents from the Advisory Committee on Small and Emerging Companies:
- Recommendation to Modernize Rule 147 under the Securities Act of 1933;
- Recommendations about Expanding Simplified Disclosure for Smaller Issuers;
- Minutes of July 15, 2015 Meeting, Advisory Committee on Small and Emerging Companies;
- Recommendations Regarding the Regulation of Finders and Other Intermediaries in Small Business Capital Formation Transactions.
Investor Advisory Committee to Meet
The SEC’s Investor Advisory Committee will meet on October 15, 2015 to discuss recent market structure developments; ETF pricing; and SEC enforcement priorities. SEC Release No. 33-9924.
Cybersecurity Investor Alert
On September 22nd, the SEC’s Office of Investor Education and Advocacy published a new Investor Alert, “Identity Theft, Data Breaches, and Your Investment Accounts.” The alert offers steps for investors to take regarding their investment accounts if they become victims of identity theft or a data breach.
On September 22nd, the SEC announced that Lara Shalov Mehraban has been named Associate Regional Director for Enforcement in the agency’s New York Regional Office. SEC Press Release.
Interview of Commissioner Gallagher
On September 21st, Crowdfund Insider published its interview of SEC Commissioner Daniel Gallagher on the eve of his departure from the agency. Interview.
Commodity Futures Trading Commission
Proposed Rules and Requests for Comment
CFTC Proposes Modifications to Position Limits Rules Applicable to Aggregation
On September 22nd, the Commodity Futures Trading Commission (“CFTC”) approved a supplement to a proposal that would modify the aggregation policy under the CFTC’s position limits regime for futures and options contracts. The supplement would allow owners of greater than 50 percent interest in another entity to disaggregate the owned entity’s positions without waiting for CFTC approval by filing notice with the CFTC that required standards have been met. Comments should be submitted within 45 days of publication in the Federal Register, which is expected the week of September 28, 2015. CFTC Press Release. See also statements by Chair Timothy Massad and Commissioner J. Christopher Giancarlo in support of the proposal.
CFTC Requests Comments on Petition for Exemption from DCO Registration by Japan Securities Clearing Corporation
On September 21st, the CFTC announced that it is seeking comment on Japan Securities Clearing Corporation’s petition for an exemption from registration as a derivatives clearing organization (“DCO”) pursuant Section 5b(h) of the Commodity Exchange Act. Comments should be submitted on or before October 2, 2015. CFTC Press Release.
Division of Clearing and Risk Offers Guidance to DCOs Regarding CFTC Regulations and PFMIs
On September 18th, the CFTC’s Division of Clearing and Risk issued a staff interpretative letter clarifying its interpretation of how Part 39 of CFTC regulations governing systemically important derivatives clearing organizations (“SIDCOs”) and DCOs that have opted into the SIDCO framework align with risk management standards set forth by the CPMI-IOSCO Principles for Financial Market Infrastructures (“PFMIs”). The staff letter explains that Part 39 of CFTC regulations incorporates all of the standards set forth and is fully consistent with the PFMIs. The letter offers specific clarification of risk management standards involving risks associated with exchange of value settlement services, DCO link arrangements, the use of central banking services, and requirements regarding due diligence on custodian banks. CFTC Press Release.
Division of Clearing and Risk Clarifies Requirements for DCOs in Use of “Firm of Forced Trade” Process
On September 18th, the Division of Clearing and Risk issued guidance regarding the use of a “firm or forced trades” process by DCOs. The staff letter explains that the use of a “firm or forced trades” process to determine the price of certain swaps in cases where public market prices are not available on its own would not require a DCO to register as a swap execution facility and a swap created by this process would not be subject to the Commodity Exchange Act’s clearing and trade execution requirements. The letter stated that a DCO should be the counterparty for swaps generated in this manner. CFTC Press Release.
CFTC Revises Asset Classes Accepted by Swap Data Repository
On September 25th, the CFTC announced that it issued an order revising the asset classes that ICE Trade Vault, LLC intends to serve in its capacity as a swap data repository. The CFTC’s order, which was issued on September 22, added the “interest rate” and “foreign exchange” asset classes to the asset classes from which ICE Trade Vault, LLC will accept swap data. CFTC Press Release.
First Subpart C DCO Registration Approved
On September 24th, the CFTC granted Nodal Clear, LLC’s application for registration as a DCO. Nodal Clear is authorized to provide clearing services for financially settled futures and options on futures executed on or through its affiliated designated contract market, Nodal Exchange, LLC. Nodal Clear is the first DCO to elect to become a Subpart C DCO at the time of its registration. CFTC Press Release.
SEF Consents to Cease and Desist Order after Touting Test Bitcoin Swap Trade as Actual Trade
On September 24th, the CFTC instituted settled administrative proceedings against TeraExchange LLC, a provisionally registered Swap Execution Facility (“SEF”), for failing to enforce its prohibition on wash trading and prearranged trading on the SEF platform. The CFTC order requires Tera to cease and desist from future violations relating to its obligations to enforce rules on trade practices. The CFTC found that Tera offered for trading on its SEF a non-deliverable forward contract based on the relative value of the U.S. Dollar and Bitcoin (the “Bitcoin Swap”). On October 8, 2014, the only two market participants authorized at that time to trade on Tera’s SEF entered into two transactions in the Bitcoin Swap. The transactions were for the same notional amount, price, and tenor, and had the effect of completely offsetting each other. At the time, these were the only transactions on Tera’s SEF. Tera arranged for the two market participants to enter into the transactions and told one that the trade would be “to test the pipes by doing a round-trip trade with the same price in, same price out, (i.e. no P/L [profit/loss] consequences) no custodian required.” However, subsequent to the transactions, Tera issued a press release and made statements at a meeting of the CFTC’s Global Markets Advisory Committee announcing the transactions, creating the impression of actual trading interest in the Bitcoin swap. Neither Tera’s press release nor the statements at the meeting indicated that the transactions were pre-arranged wash sales executed for the purpose of testing Tera’s systems. CFTC Press Release. See also Bowen Dissent (CFTC Commissioner Sharon Bowen objects to the lack of penalties).
Federal Rules Effective Dates
September 2015 - November 2015
Click here ti view table.
Exchanges and Self-Regulatory Organizations
Longer Period Designated for Consideration of Proposed Rules Regarding Layering and Spoofing
On September 23rd, the SEC designated November 17, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding BATS Exchange’s proposed adoption of rules for an expedited proceeding for issuing suspension orders, and if necessary, imposing other sanctions, to prohibit Exchange Members, or their clients, from engaging in trading activities that constitute continued layering or spoofing on the Exchange. SEC Release No. 34-75970.
Financial Industry Regulatory Authority
FINRA Investor Alert on “Smart Beta.”
On September 23rd, the Financial Industry Regulatory Authority (“FINRA”) issued a new Investor Alert called “Smart Beta - What You Need to Know.” FINRA published this alert to educate investors about financial products, primarily ETFs, which are linked to and seek to track the performance of alternatively weighted indices commonly referred to as "smart beta" indices.
FINRA Press Release.
FINRA Poised to Impose Substantial Fines in 2015
On September 21st, Think Advisor reported that FINRA is on track to impose the second-highest amount of fines in 2015 since the financial crisis. The article noted that during the first half of 2015, FINRA imposed $37.5 million in fines, and imposed the most fines in disciplinary proceedings involving trade reporting and short selling.FINRA Fines.
International Swaps and Derivatives Association
ISDA Publishes Australian Single-Sided Reporting Letter
On September 24th, the International Swaps and Derivatives Association (“ISDA”) published the ISDA Australian Single-Sided Reporting Letter, which allows certain market participants to take advantage of the Australian single-sided reporting regime for Phase 3 Entities. The letter allows market participants to provide counterparties with status representations that can be used to help determine whether single-sided reporting is applicable for those entities with total gross notional outstanding positions of less than A$5b (Phase 3 Entities), provided they engage in derivatives transactions with counterparties that are already required or agree to report. ISDA Press Release.
Municipal Securities Rulemaking Board
MSRB Proposes Disclosure of Mark-Ups
On September 24th, the Municipal Securities Rulemaking Board (“MSRB”) published for comment a proposal that would require municipal securities dealers to disclose on retail customer confirmations the amount of the mark-up in a class of principal transactions. If adopted, the amendments to MSRB Rule G-15 would require dealers acting as principal to disclose to retail customers their mark-up from the prevailing market price of a municipal security if the dealer makes a corresponding trade within two hours of the customer trade. To assist investors in learning more about the market for their traded security, the draft amendments also would require all retail customer confirmations to include a link to the main page for the security on the MSRB’s Electronic Municipal Market Access website. Comments should be submitted on or before November 20, 2015. MSRB Press Release.
Longer Period Designated for Consideration of Proposed Securities Lending Fee
On September 18th, the SEC designated November 18, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE Arca’s proposed rule change relating to implementation of a fee on securities lending and repurchase transactions with respect to shares of the CurrencyShares® Euro Trust and the CurrencyShares® Japanese Yen Trust, which are currently listed and trading on the Exchange under NYSE Arca Equities Rule 8.202. SEC Release No. 34-75945.
New York Congresswoman Seeks to Amend Investment Company Act to Protect Puerto Rican Investors
On September 25th, the New York Times reported that Rep. Nydia M. Velázquez will introduce a bill that would amend the Investment Company Act of 1940 to extend regulatory oversight to Puerto Rican mutual funds. The article notes that Puerto Rican investment firms have been excluded from regulation under the Investment Company Act. The proposed amendment, which responds to recent questionable transactions involving bond offerings repackaged by an investment firm into its own mutual funds, would prevent mutual funds in Puerto Rico from engaging in affiliated transactions and other practices that are not permitted on the mainland. Puerto Rican Mutual Funds.
DOJ Brings Additional Charges Against Flash Crash Trader
On September 25th, Bloomberg reported that the extradition hearing for Navinder Singh Sarao, the British trader implicated in the 2010 Flash Crash, has been postponed until February 2016 in the wake of additional charges announced by the U.S. Department of Justice (“DOJ”) on Friday. According to the report, the DOJ now claims that Sarao’s illegal activity occurred over a greater period of time than alleged in its original complaint. Flash Crash Extradition.
Collateral Requirements for Non-Cleared Inter-Affiliate Swaps
On September 24th, Bloomberg, citing unidentified sources, reported federal financial regulators are close to completing new collateral requirements for non-cleared inter-affiliate swap trades. Under the new rules, only the affiliate would be required to post collateral. Collateral Requirements.
Warren Prods IRS to Act on Proposed Limit to Private Equity Fee Waivers
On September 22nd, the Boston Globe reported that Senator Elizabeth Warren is pressuring the Internal Revenue Service (“IRS”) to finalize a proposed rule that would require private equity fund managers to apply a higher tax rate to the income they receive from management fees. The IRS proposed rule would tighten requirements surrounding fee waivers that allow fund managers to apply capital-gains tax rates to their management fees. Tax Loophole.
Rakoff’s Approach to Insider Trading Cases Questions Newman Ruling
On September 21st, the Wall Street Journal published an article profiling the role of U.S. District Judge Jed Rakoff in recent court decisions in cases involving insider trading in the wake of the Second Circuit’s decision in U.S. v. Newman. The article suggests that Rakoff is subtly questioning the ruling, noting that Rakoff, along with several other judges, are narrowly construing the opinion which requires prosecutors to establish that a person tipping inside information gained a benefit “of consequence” and that this benefit was known to those trading on the information. Rakoff recently delayed ruling in an insider trading case until the Supreme Court decides whether it will review the Second Circuit’s decision in Newman. Rakoff.
Former Adviser Pleads Guilty to Improperly Accessing Morgan Stanley Client Data
On September 21st, Bloomberg reported that a former financial adviser at Morgan Stanley has entered a guilty plea to charges that he gained unauthorized access to the bank’s computer network. Galen Marsh downloaded confidential customer data to a private server at his home. Eventually, Morgan Stanley discovered that account information for hundreds of clients had been transferred to a public website, although Marsh maintained that he did not post the information publicly or intend to share or sell it. Marsh will be sentenced in December and faces up to five years in prison. Client Data.
Compliance Professionals Demand Clarity from SEC in Enforcement Proceedings
On September 21st, Reuters reported that the National Society of Compliance Professionals, an organization that represents compliance professionals in the financial services industry, has requested that the SEC establish guidelines for its enforcement staff in cases involving compliance violations. The organization’s request seeks to prevent cases in which compliance officers become the target of enforcement actions based on violations committed by others, a concern that has increased following a spate of recent enforcement proceedings against compliance officers. Compliance Clarity.
Asset Owners, Investors Must Prepare for Changes to SEC Money Market Rules
On September 21st, Pensions & Investments reported that, according to a survey conducted by SimCorp, the vast majority of North American asset owners and financial services firms are unprepared for new SEC rule amendments on valuing prime money market funds. According to the article, 85 percent of those surveyed admitted to having limited understanding of the rule changes and 75 percent said they were not completely prepared for the new rules, which will become effective on October 26, 2015, and will require compliance by October 14, 2016. Money Market Rules. On September 21st, Pensions & Investments also published an article discussing the potential consequences faced by investors who wait to withdraw from prime money market funds after the SEC rule changes become effective. Money managers warn that the withdrawal restrictions and potential for withdrawal fees accompanying the new rules may lead to a mass exit from funds as the effective date draws near, raising the potential for investment losses and reduced liquidity. Money Market Delay.