Insights from Winston & Strawn

An SEC Risk Alert published on November 9, 2015, by the Office of Compliance Inspections and Examinations (OCIE) highlighted the risks associated with using an outsourced chief compliance officer (CCO), based on the findings of nearly 20 examinations that OCIE conducted as part of its “Outsourced CCO Initiative.” The Risk Alert noted several outsourced CCO arrangements which did not pass muster, such as where an outsourced CCO could not identify their investment adviser client’s specific business or compliance risks or, if such risks were identified, the CCO either failed to tailor the policies and procedures to address those risks or failed to verify that actual practices matched the required procedures. However, the OCIE did not wholly condemn the outsourced CCO model and discussed instances where outsourced CCOs were “generally effective.” Factors noted as contributing to the failure or success of an outsourced CCO arrangement are discussed here.

The Risk Alert follows SEC Enforcement Director Andrew Ceresney’s remarks at an industry conference on November 4, 2015, where Director Ceresney assured investment advisers that the SEC will not scrutinize a CCO’s choices in the carrying out of its compliance function, but is concerned with the wholesale failure of a CCO to establish or implement policies and procedures required under the Investment Advisers Act and Investment Company Act. In his speech, Director Ceresney noted questions that firms should ask themselves to assess whether they are at risk for an enforcement action. These include whether compliance personnel are included in important meetings, whether the input of compliance personnel is frequently sought and followed, whether compliance officers report to the CEO and have visibility with the board, and whether the compliance department is provided with the staff, resource, and other support needed to succeed. The Risk Alert noted similar factors considered by OCIE in evaluating the effectiveness of an investment advisory firm’s compliance program and outsourced CCO, and stressed that “[a] CCO, either as a direct employee of a registrant or as a contractor or consultant, must be empowered with sufficient knowledge and authority to be effective.”

Taken together, the Risk Alert and Director Ceresney’s remarks serve as a reminder to investment advisers that they should conduct periodic, meaningful risk assessments of their businesses, including the risks associated with using an outsourced CCO and ensure their policies and practices address those risks.

Feature: New Rules on Securitizations at the Top of the EU’s Capital Markets Union Action Plan

The European Commission recently took steps toward implementing measures to increase the availability of investment financing across the EU by releasing the Capital Markets Union Action Plan. The Action Plan follows a consultation launched earlier this year, which sought input on measures to create a single market for capital in Europe as well as proposals on securitizations and the prospectus directive. European Commission Commissioner Jonathan Hill described the overarching goal of the Capital Markets Union as a means to “build stronger more sustainable capital markets and remove … barriers to cross-border investment.” 

Early Initiatives

Although it represents a long-term approach to developing a single market for capital in the EU, the Action Plan highlights several key early initiatives. At the forefront of these initiatives is a revised regulatory framework for securitizations, which the Commission hopes will boost EU securitization issuances closer to pre-crisis level, generating an additional €100-150 billion in funding. The securitization initiative under the plan consists of two legislative proposals. The first sets out the criteria for Simple, Transparent and Standardized (“STS”) securitizations and adjusts the regulatory framework to allow for a more risk-sensitive approach.  Among other things, the proposal includes risk-retention requirements, which specify that the originator, sponsor, or original lender of a securitization must retain a five percent interest in the securitization. The second proposes amendments to the Capital Requirements Regulation to lower capital charges for STS securitizations and recalibrate the regulatory capital requirements for STS securitizations. These measures incorporate the framework jointly recommended by the Basel Committee on Banking Supervision and the International Organization of Securities Commission (“IOSCO”) as well as the recommendation by the European Banking Authority (“EBA”) to lower capital charges and amend capital requirements for STS securitizations.

Another early initiative set out in the Action Plan is new legislation to amend the Solvency II Delegated Regulation to support long-term financing of infrastructure projects by insurers.  Among other things, the legislation creates a distinct asset category for qualifying infrastructure investments that will reduce capital charges that apply to insurers participating in these investments.

Public Consultations

The Action Plan also included two public consultations. The first Consultation Paper concerns proposed changes to existing rules governing venture capital funds to support increased interest in these investments. The second Consultation Paper seeks comment on a proposal for a pan-European covered bond framework to facilitate cross-border investment. Comments on both consultations should be submitted on or before January 6, 2016.

The final early action item included in the Action Plan is a “call for evidence” concerning the impact of current financial regulations. This consultation seeks concrete feedback on unintended consequences, inconsistencies, and gaps in current financial rules; unnecessary regulatory burdens; and rules that have affected growth or the ability of the economy to finance itself.  Comments should be submitted on or before January 6, 2016.

Initial Reactions

Initial reactions to the Capital Markets Union Action Plan were generally favorable, with EU finance ministers expected to reach an agreement on the plan by the end of the year and a call for rapid adoption of the securitization proposals by European lawmakers, according to a report in Reuters. Some critics, including insurers, see the Action Plan as insufficient in addressing obstacles to investment, arguing that capital charges under the plan remain overinflated. In addition, consumer organizations say efforts will also be needed to restore trust to persuade consumers to invest in riskier investments. And, according to a report in the Financial Times, French regulators fault the securitization proposal for lacking a regulatory entity to monitor the application of STS criteria, raising concerns that the omission will undermine investor confidence.

Looking Ahead

The Action Plan lays the foundation for the formation of the Capital Markets Union by 2019, although it is unclear whether this timeline will be impacted by the possible delay to the effective date of the Markets in Financial Instruments Directive II (MiFID II) legislation. According to a report in Reuters, the implementation of MiFID II, which contains important measures relevant to the Capital Markets Union, may be delayed by one year to allow the financial services industry more time to prepare.

Banking Agency Developments


Agencies Announce Final EGRPRA Outreach Meeting

On November 13th, the Office of the Comptroller of the Currency (“OCC”) announced that the federal banking agencies will hold an outreach meeting on December 2, 2015 at the Federal Deposit Insurance Corporation (“FDIC”) in Arlington, Va., as part of their regulatory review under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (“EGRPRA”). The meeting will feature panel presentations by bankers and consumer and community groups. Interested people may also present their views on any of the 12 categories of regulations listed on the EGRPRA website.

FFIEC’s Revised Management Booklet Is Released

On November 10th, the OCC announced that the Federal Financial Institutions Examination Council (“FFIEC”) has revised the “Management” booklet of the “FFIEC Information Technology Examination Handbook (IT Handbook).” The revised “Management” booklet provides guidance to examiners and outlines the principles of governance and risk management as they relate to IT. This guidance applies to all national banks and federal savings associations. OCC Bulletin.

OCC Issues Interagency Guidance on Capital Deduction Methodology

On November 6th, the OCC, along with the Board of Governors of the Federal Reserve System and the FDIC, issued interagency guidance to banking organizations. The interagency guidance addresses the deduction from regulatory capital for certain investments in covered funds pursuant to Section 13 of the Bank Holding Company Act, also known as the Volcker rule. The guidance clarifies the interaction between the deduction for covered funds under the Volcker rule and the deductions required for certain investments in non-consolidated financial institutions under the regulatory capital rule at 12 CFR 3. OCC Bulletin.

Shared National Credits Review Notes High Credit Risk

On November 5th, the OCC announced that the annual Shared National Credit (“SNC”) review of large shared credits was released by the Board of Governors of the Federal Reserve System, the FDIC, and Office of the Comptroller of the Currency to assess risk in the largest and most complex credits shared by multiple financial institutions. According to the review, credit risk in the SNC portfolio remained at a high level. OCC Press Release.

Federal Reserve

FRB Announces Annual Indexing of Reserve Requirement Exemption Amount and of Low Reserve Tranche for 2016

On November 12th, the Federal Reserve Board (“FRB”) announced the annual indexing of two amounts (the reserve requirement exemption amount and the low reserve tranche) used in determining reserve requirements of depository institutions. Annual Indexing.

Treasury Department Developments

Joint Statement from U.S. and U.K. Governments Discusses Effective Responses to a Cyber Incident in the Financial Sector

On November 12th, the U.S. Department of the Treasury announced that the governments of the U.S. and U.K. conducted a joint table-top exercise with leading global financial firms to enhance our cooperation and ability to respond effectively to a cyber incident in the finance sector. This exercise is part of enhanced transatlantic engagement on cybersecurity and reflects the importance of international cooperation in cyberspace, especially given the interconnectedness of the global financial system. Cyber Incident.

Securities and Exchange Commission

Exemptive Orders

SEC Delays Tick Size Pilot Implementation

On November 6th, the Securities and Exchange Commission (“SEC”) issued an order exempting several self-regulatory organizations (“SROs”) from compliance with the National Market System Plan to implement a Tick Size Pilot program until October 3, 2016. The SEC explained that required SRO rule proposals related to the Tick Size Pilot program have yet to be filed or approved by the Commission and the SROs need additional time to develop and test their trading and compliance systems. SEC Release No. 34-76382.

Speeches and Statements

Commissioner Stein Advises Regulators to Surf the Wave of Market Innovation

In a lecture delivered to Harvard Law School on November 9th, SEC Commissioner Kara Stein considered the challenge of maintaining market quality and competitiveness in the face of disruptions posed by market innovation. Stein examined how changes in the market such as the migration of financial services to virtual locations, exchange-traded funds, and technological innovation in market structure create promising benefits and regulatory challenges. Stein concluded that regulators must embrace innovation to stay ahead of the potential pitfalls of market evolution to ensure market excellence. Stein Remarks.

Other Developments

Staff Announcements

On November 13th, the SEC announced that Sanket J. Bulsara will assume the role of Deputy General Counsel for Appellate Litigation and Adjudication.  Bulsara will succeed Michael A. Conley, who has been appointed as SEC Solicitor. On November 12th, the SEC announced that it has appointed Marc Wyatt as Director of the Office of Compliance and Inspections (“OCIE”). Wyatt has served as the OCIE’s Acting Director since April 2015. The SEC also named Olivier Girod to serve as Deputy Director of the Office of Support Operations. In this role, Girod will support building operations, records management, business management, security, and Freedom of Information Act services.

On November 12th, the SEC published discussion and panelist materials for the Panel on Exempt Offerings—Post JOBS Act implementation, which will be part of the SEC’s Government-Business Forum on Small Capital Formation on November 19, 2015. SEC Small Business Forum Webpage.

Commodity Futures Trading Commission

CFTC’s DMO Issues Time-Limited Extension of Swap Data Reporting Relief for Certain Swap Dealers and Major Swap Participants

On November 9th, the Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight (“DMO”) issued a time-limited no-action letter that provided relief to certain CFTC-registered swap dealers and major swap participants established under the laws of Australia, Canada, the European Union, Japan, or Switzerland.CFTC press release.

OTC Derivatives Regulators Deliver Report to the G20 Leaders

On November 6th, the OTC Derivatives Regulators Group (“ODRG”) announced its delivery of a report to the G20 Leaders that provides an update regarding the ODRG’s continuing effort to identify and resolve cross-border issues associated with the implementation of the G20 OTC derivatives reform agenda. ODRG Report.

Federal Rules Effective Dates

November 2015 - January 2016

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Exchanges and Self-Regulatory Organizations


BATS Withdraws Proposed Rules to Prohibit Spoofing and Layering

On November 9th, the SEC announced that BATS Exchange, Inc. (“BATS”) has withdrawn a proposal to adopt an expedited proceeding for issuing suspension orders or other sanctions to prohibit layering or spoofing activities by members or their clients on the BATS exchange. SEC Release No. 34-76393.

Financial Industry Regulatory Authority

SEC Seeks Additional Comment on FINRA’s Proposed Rule Addressing Outside Accounts

On November 12th, the SEC instituted proceedings to determine whether to approve or disapprove a proposal by the Financial Industry Regulatory Authority (“FINRA”) to adopt new rules that would require associated persons to obtain their employer firm’s permission before opening an account in which securities transactions can be effected and in which they have a beneficial interest at a member other than their employer firm or at any other financial institution. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 16, 2015. SEC Release No. 34-76430.

FINRA Releases Quarterly ATS Data

On November 10th, FINRA published Alternative Trading Systems (“ATS”) Data for the third quarter of 2015.FINRA Press Release.

FINRA Extends Compliance Date for Electronic Blue Sheet Data Elements Concerning Large Traders

On November 6th, FINRA announced that it will extend the effective date for compliance with certain Electronic Blue Sheet data elements until November 1, 2017. FINRA extended the compliance date for these data elements to be consistent with recent exemptive relief granted by the SEC, which extended the compliance date for certain broker-dealer recordkeeping and reporting requirements related to large trader identification and transaction information from November 1, 2015, until November 1, 2017. FINRA Regulatory Notice 15-44.

International Swaps and Derivatives Association

ISDA Announces New Resolution Stay Protocol to Reduce Risk to Cross-Border Derivatives and Securities Financing Transactions

On November 12th, the International Swaps and Derivatives Association (“ISDA”) announced that it has relaunched the ISDA Resolution Stay Protocol to cover securities financing transactions (“SFT”), which applies special resolution regimes for participating entities to apply statutory stays on cross-default and early termination rights to cross-border derivatives and SFT transactions in the event a bank counterparty enters into resolution. According to the ISDA, 21 major global banks have already signed the protocol. ISDA Press Release.

Municipal Securities Rulemaking Board

MSRB Offers Regulatory and Compliance Guidance to Municipal Advisors

On November 12th, the Municipal Securities Rulemaking Board (“MSRB”) published a compliance advisory for municipal advisors. The compliance advisory is a new guide that offers assistance to municipal advisors in understanding regulatory requirements developed by the MSRB under the Dodd-Frank Wall Street Reform and Consumer Protection Act and identifying potential risks associated with failing to implement appropriate compliance controls. MSRB Press Release.

MSRB Submits Amendment Adding Exception to Principal Transaction Prohibition in Non-Solicitor Municipal Advisor Proposal

On November 10th, the SEC announced that the MSRB has filed an amendment to its proposal to adopt new rules to establish the core duties and standards of conduct of non-solicitor municipal advisors when engaging in municipal advisory activities. The amendment would provide a limited exception to a prohibition in the proposed rule on certain principal transactions for transactions in certain types of fixed income securities, define the types of fixed income securities, and make other technical amendments to the proposed rule. Comments on the amendment should be submitted within 14 days of publication in the Federal Register, which is expected the week of November 19, 2015. SEC Release No. 34-76420.

MSRB Proposes Rule Amendments to Shorten Municipal Securities Settlement Cycle

On November 10th, the MSRB published for comment a proposal to amend its rules to shorten the settlement cycle for municipal securities transactions. The proposal would amend MSRB Rules  G-12(b)(ii) and G-15(b)(ii) to define the regular-way settlement cycle for municipal securities transactions as T+2 (trade date plus two days), which reflects an industry-wide initiative to shift from the current T+3 (trade date plus three days) regular-way settlement cycle. Comments should be submitted on or before December 10, 2015. MSRB Regulatory Notice 2015-22.

MSRB Gains Approval of Proposal to Extend Gift Rules to Municipal Advisors

On November 6th, the SEC approved the MSRB’s proposed rule change to amend its rules to extend requirements governing gifts, gratuities and non-cash compensation to municipal advisors and their associated persons, to extend recordkeeping requirements regarding gifts to municipal advisors, and to delete prior interpretative guidance that is superseded by new guidance included in the proposed rule amendments. SEC Release No. 34-76381.

National Futures Association

NFA Offers Guidance on Filing CTA and CPO Forms

On November 10th, the National Futures Association (“NFA”) issued responses to frequently asked questions (“FAQs”) to assist commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) in completing and filing CTA Form PR and the CPO Form PQR. The NFA also released a tutorial video to provide assistance in filing and completing Form PR. NFA Notice I-15-25.

National Stock Exchange, Inc.

NSX Prepares to Resume Operations

On November 9th, the National Stock Exchange, Inc. (“NSX”) filed with the SEC proposed rule changes that would amend its rules regarding hours of trading to rescind a provision that allowed for the cessation of all trading activity as of May 30, 2014 so that NSX may resume trading activity. The proposal contains several other rule amendments to assist the exchange in preparing to resume operations, including a new rule to describe NSX’s use of data feeds in order handling and execution and rule amendments related to Double Play and Auto-Ex Order types, among other things. Comments should be submitted on or before December 4, 2015. SEC Release No. 34-76390.


NYSE Arca Proposes New Policy to Address Aberrant Trades in Exchange Traded Products

On November 12th, the SEC requested comment on NYSE Arca, Inc’s (“NYSE Arca”) proposal to adopt a new policy relating to its treatment of trade reports for Exchange Traded Products (“ETPs”) that it finds are inconsistent with the prevailing market. The proposed policy would reflect the current policy to address instances of “aberrant” trades for equity securities, but would address aberrant trades that are specific to ETPs on the Exchange. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 16, 2015. SEC Release No. 34-76431.

NYSE Launches Utility for Electronic Document Submission in Response to Regulatory Inquiries

On November 11th, the New York Stock Exchange (“NYSE”) issued an Information Memo containing additional information related to the transfer of certain surveillance, investigations, and enforcement responsibilities from FINRA to NYSE Regulation on January 1, 2016. According to the Memo, NYSE Regulation will employ a new utility to allow members to transmit data related to regulatory inquiries via secure FTP and requests that members submit a questionnaire containing appropriate technology or operations contacts by December 1, 2015. NYSE Regulation will also conduct a series of webinars during November to provide members with additional information regarding the new regulatory program. NYSE Information Memo 15-7.

NYSE Exchanges Propose Wireless Access to Third Party Market Feeds

On November 5th, the SEC provided notice of NYSE Arca’s and NYSE MKT LLC’s (“NYSE MKT”) separately proposed amendments to their respective rules that would allow co-located Users to receive market data feeds from third party markets via a wireless connection. The proposal also establishes fees for the use of this service and would amend NYSE Arca’s and NYSE MKT’s respective price lists and fee schedules to reflect these new fees. Comments should be submitted on or before December 3, 2015.

Options Clearing Corporation

OCC Proposes Changes to Margin Methodology Related to Implied Volatility for Shorter Tenor Options

On November 10th, the SEC announced the filing of a proposed rule change by The Options Clearing Corporation (“OCC”) that would modify OCC’s margin methodology by incorporating variations in implied volatility for “shorter tenor” options within the System for Theoretical Analysis and Numerical Simulations (“STANS”). Comments should be submitted within 15 days of publication in the Federal Register, which is expected the week of November 16, 2015. SEC Release No. 34-76421.

Industry News

CFOs and Auditors Clash Over Clawbacks

On November 11th, reported on a new study published in The Accounting Review which found that CFOs whose pay is strongly linked to their employers’ financial fortunes are likely to push back against auditors proposing accounting restatements if the companies have clawback policies. Prior research has shown that, at companies with voluntarily adopted clawbacks, “there are fewer restatements because upfront the CFOs and the financial statement makers are doing a more diligent job” of preventing the errors and fraud that can lead to misstatements. Clawback Policies.

SEC Is Focusing on Short Selling

SEC Chair Mary Jo White hinted that the agency would consider rules requiring short-selling disclosures by investors. On November 10th, Bloomberg Business reported on Chair White’s comment that “[s]hort selling has a legitimate, positive purpose in the marketplace … [t]hat’s very different, though, than if you manipulate by short selling.” Short Selling.

SEC Is ‘Full-Out’ Working on Fiduciary Rule

On November 10th, InvestmentNews reported on Chair White’s comment that the agency is “full-out,” but slowly, working on a proposal to raise standards for retail investment advice. Chair White added that the main reason for the slow pace is that the agency wants to avoid unintended consequences. Fiduciary Rule.