Insights from Winston & Strawn

While political gridlock in Washington has caused the well-known stalemate over filling the presently vacant U.S. Supreme Court seat, it has also notably caused a lengthy delay in the confirmation of two pending nominees to fill open Commissioner positions at the Securities and Exchange Commission.  While some say the SEC’s reduced slate of commissioners, as well as uncertainty about how the impending U.S. Presidential election will affect the commission, have slowed SEC decision-making and resulted in a “lack of cohesive leadership at the top,” the SEC appears poised to continue examinations and enforcement actions related to investment advisers and private funds at a healthy clip in its upcoming fiscal year 2017, which begins on October 1.

Following its filing of a record 807 enforcement actions in fiscal year 2015, the SEC has maintained a strong pace in fiscal year 2016.  Per an article appearing in Pensions & Investments, the SEC continues to increase its resources dedicated to investment adviser and private fund examinations and enforcement.  The SEC has reassigned and brought in other examiners to focus on these areas during calendar year 2016 to the extent that Commissioner Kara Stein estimated at a conference earlier this year that the SEC could double its earlier examination rate of 10% of money managers, who cover 30% of assets under management.

In addition, the P&I article notes that the SEC’s enforcement division has requested in its fiscal year 2017 operating budget 53 new positions, as well as funding that represents a 6% increase over 2016, and 12% over 2015.  The article also describes how the SEC’s examination and enforcement activities are increasingly relying on more sophisticated technology, quantitative market and performance data analysis, and collaboration among SEC offices and divisions in order to assess risk and identify and quantify issues.  

SEC areas of focus for examinations and enforcement are expected to continue to include valuation, conflicts of interests, governance, and allocations of fees and expenses.

Feature: Female CEOs and Shareholder Activism

Female CEOs are far more likely to be targeted by shareholder activism than their male counterparts, and they are also more likely to be confronted by activist investors who presume that their company’s stock price will fall. That was the conclusion of a recent study by the W. P. Carey School of Business at Arizona State University, “The Glare of the Spotlight: Female Leadership and Shareholder Activism,” which found that gender is the leading factor in determining whether a CEO will be under fire by shareholder activism.

Arizona State’s Dr. Christine Shropshire, an associate professor of management who surveyed shareholder proposals at Fortune 1000 companies between 2003 and 2013, referenced earlier studies that found that when a female CEO is appointed, the market reacts negatively with a drop in stock price. Shropshire saw that “[t]hose effects aren’t just to the firm that is announcing its female CEO. There are negative spill-over market effects for other female-led firms at the same time.” She pointed out that, “[e]specially with new CEOs, investors face asymmetric information and challenges in how to evaluate them, and that makes shareholder activists more likely to respond based on stereotypes and status threats.”

Shropshire said in a statement that the rate of shareholder activism remained steady across industries, company sizes and performance levels, so therefore “gender alone explains significant activism specifically toward female CEOs.” Shropshire added that “female CEOs have a 27% likelihood of facing activism, while their male counterparts have a close to zero predicted likelihood of being targeted.” This means that one out of every four women who take charge of a major public company will be confronted by an activist investor.

According to Shropshire’s study, female leadership is pigeonholed by activist investors as collaborative, interactive and engagement-oriented. Conversely, activist investors consider male leadership to be powerful and authoritative. This is noteworthy since a majority of activist investors hold the belief that women are easily swayed. Shropshire concluded that female CEOs are seen as weaker, and therefore easier to boss around.

Shropshire questioned if having more public information through public relations initiatives could moderate the shareholder activism these women face. According to her research, women-led firms produce approximately 20% more press releases than male-led firms. In addition, firms with a female CEO receive two times more media coverage than firms managed by a man. Both the proactive PR and the media coverage deflect some of the shareholder activism that female-led firms receive. Shropshire concluded that this reflects “signaling theory” in action, meaning that “we don’t know unobservable characteristics about a firm, and that makes us more likely to draw on stereotypes.” Press releases and media coverage, she noted, “help offset that increased activism we find at the female-led firms.”

Fortune’s Pattie Sellers has a different theory about why female CEOs are more likely to be targeted by shareholder activism, at least when it comes to one activist investor in particular. In January 2015, Sellers suggested that Trian Partners’ Nelson Peltz, a billionaire corporate raider, zeros in on female CEOs because they’re actually “tougher” targets and better sparring partners than men.

Whether or not shareholders target female CEOs, female CEOs of Fortune 1000 companies have been found to perform three times better than S&P 500 companies that are mostly run by men. According to Karen Rubin, the project manager at a trading platform that is based on crowdsourced algorithms, “[t]here’s a lot of the theorizing around why the results are dramatically higher for the women, but most think it has to do with how hard women have to work to become CEO at such big companies in the first place.”

Banking Agency Developments


Bank Accounting Advisory Series Updated

On August 18th, the Office of the Comptroller of the Currency (“OCC”) released an update to the Bank Accounting Advisory Series, which promotes consistent application of accounting standards among national banks and federal savings associations. This update includes recent answers to frequently asked questions from the industry and examiners covering areas such as contingencies, and fair value accounting.

2015 Small Business, Small Farm, and Community Development Lending Data Is Available

On August 18th, the three federal banking agency members of the Federal Financial Institutions Examination Council (“FFIEC”) with Community Reinvestment Act (“CRA”) responsibilities (the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation) announced the availability of data on small business, small farm, and community development lending reported by certain commercial banks and savings associations, pursuant to the CRA.

National Banks and Federal Savings Associations Affected by Severe Weather in Louisiana to Close

On August 16th, the OCC issued a proclamation allowing national banks and federal savings associations at their discretion to close offices affected by severe storms and flooding in Louisiana. See OCC Bulletin 2012-28 Supervisory Guidance on Natural Disasters and Other Emergency Conditions for guidance on actions bankers could consider applying when their bank or savings association operates or has customers in areas affected by a natural disaster or other emergency.

Federal Reserve

Board Launches Facebook Page

On August 18th, the Federal Reserve Board launched a Facebook page, which will include press releases, speeches, testimony, reports, educational materials, FAQs, photos, and videos.

Treasury Department Developments

Treasury Department Releases Treasury International Capital Data for June

On August 15th, the U.S. Department of the Treasury released Treasury International Capital (“TIC”) data for June 2016. The sum total in June of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC outflow of $202.8 billion.


Thomas Ott Named Associate Director of Enforcement

On August 16th, Jamal El-Hindi, Acting Director of the Financial Crimes Enforcement Network (“FinCEN”), announced the selection of Thomas P. Ott as Associate Director for its Enforcement Division. Mr. Ott will oversee FinCEN’s Bank Secrecy Act compliance and enforcement program.

Securities and Exchange Commission

Corporation Finance Grants Exemptive and No-Action Relief to German Company in Tender Offer for Semiconductor Equipment Supplier

On August 17th, the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance granted an exemption to Grand Chip Investment GmbH, in its all cash tender offer for shares of AIXTRON SE, from Securities Exchange Act Section 14(d)( 5) and Rule 14d-7 to terminate withdrawal rights for shares tendered during the acceptance period and additional acceptance period. In addition, the Division granted Grand Chip’s request for an exemption from Exchange Act Rules 14d-l l(c) and (e) to permit payment for shares tendered during the additional acceptance period between four and 12 banking days after the expiration of the additional acceptance period or four to 12 banking days after the satisfaction or waiver of the regulatory offer conditions, whichever is later. The Division also granted Grand Chip’s request for no-action relief from Rule 14e-1(b) to permit Grand Chip to extend the acceptance period for a period of two calendar weeks in the event of a change that would otherwise require an extension of ten U.S. business days, as required by German law. No-Action Letter

SEC Investor Advocate Signals Support for PCAOB’s Reproposed Auditing Standard Requiring Disclosure of Critical Audit Matters

On August 15th, SEC Investor Advocate Rick A. Fleming submitted a letter to the Public Company Accounting Oversight Board (“PCAOB”) expressing support for the Board’s reproposed audit reporting standard that would require additional disclosures of critical audit matters arising from an audit as well as the disclosure of auditor tenure. Fleming explained that the proposed requirements would improve the communication value of audit reports and make them more usable for investors. SEC Investor Advocate Letter

DERA Offers Analysis of CMBS Market

Staff in the SEC’s Division of Economic and Risk Analysis (“DERA”) published a white paper on August 11th entitled Issuance Activity and Interconnectedness in the CMBS Market. The white paper examines the concentration and interconnectedness in the commercial mortgage-backed securities (“CMBS”) market before and after the global financial crisis. DERA White Paper

Commodity Futures Trading Commission

Staff Releases Swap Dealer De Minimis Exception Final Staff Report

On August 15th, the Division of Swap Dealer and Intermediary Oversight announced that it has issued the Swap Dealer De Minimis Exception Final Staff Report, which supplements the Swap Dealer De Minimis Exception Preliminary Report that was issued on November 18, 2015. The current de minimis threshold for swap dealer registration of $8 billion is scheduled to decrease to $3 billion in December 2017, unless the CFTC takes further action. The Preliminary Report used available swap data to assess the de minimis exception level in light of the policy goals for swap dealer registration, and requested public comment on the report. The Final Report summarizes the public comments received in response to the Preliminary Report and provides further data analysis. In addition, it discusses the de minimis exception alternatives noted in the Preliminary Report and identifies issues for the CFTC’s consideration. Commissioner Giancarlo Statement

Federal Rules Effective Dates

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Exchanges and Self-Regulatory Organizations

Financial Industry Regulatory Authority

SEC Approves FINRA’s Capital Acquisition Broker Rules

On August 18th, the SEC issued an order approving the Financial Industry Regulatory Authority’s (“FINRA”) amended proposal to create a separate rule set to apply to firms that meet the definition of a “capital acquisition broker” (“CAB”) and elect to be governed under this rule set. SEC Release No. 34-78617

FINRA Proposes Disclosure of Additional Pricing Information for Transactions in Fixed Income Securities with Retail Customers

On August 15th, the SEC requested comments on a proposal filed by FINRA that would amend its customer confirmation rules to require members to disclose additional pricing information on retail customer confirmations relating to transactions in fixed income securities. Among other things, the proposed amendments would require members to disclose the mark-up or mark-down from the prevailing market price for the security on the customer confirmation, if the member also executes one or more offsetting principal transactions on the same trading day on the same side as the customer trade. Comments should be submitted on or before September 9, 2016. SEC Release No. 34-78573

FINRA Offers Guidance on New Margin Requirements for Covered Agency Transactions

FINRA published a Regulatory Notice on August 12th that provides an overview of recently approved changes to FINRA Rule 4210 (Margin Requirements), which establish margin requirements for Covered Agency Transactions. Under the amended rule, FINRA members will be required to collect daily mark to market margin from all counterparties for their Covered Agency Transactions and maintain margin of two percent for accounts that are not exempt accounts. The rule will also require members to make and enforce a written risk limit determination for each counterparty involved in a Covered Agency Transaction. The rule amendments relating to the risk limit determination requirements will become effective on December 15, 2016, while all other amendments will go into effect on December 15, 2017. FINRA Regulatory Notice 16-31

ICE Clear Credit

SEC Approves ICC’s Proposed Changes to its Treasury Operations Policies

On August 12th, the SEC issued an order approving ICE Clear Credit LLC’s (“ICC”) proposed rule change that would revise the ICC Treasury Operations Policies and Procedures to provide for the use of a committed foreign exchange (“FX”) facility, make changes to the investment guidelines as well as additional clean-up changes, and provide additional clarification regarding the calculation of collateral haircuts. SEC Release No. 34-78566

International Swaps and Derivatives Association

ISDA Releases Review of IRD and CDS Trading Activity During Second Quarter of 2016

On August 16th, the International Swaps and Derivatives Association (“ISDA”) published its SwapsInfo Quarterly Review for the second quarter of 2016. The review, which analyzes interest rate derivatives (“IRD”) and credit default swap (“CDS”) index trading activity in the U.S., found that the majority of the trades reported to U.S. trade repositories were traded on an electronic execution venue, IRD notational volumes rose for the third straight quarter, and the CDS index notational volumes fell sharply. SwapsInfo Second Quarter 2016 Review

ISDA Launches 2016 Variation Margin Protocol

On August 16th, ISDA announced the release of the ISDA 2016 Variation Margin Protocol, which is designed to assist market participants in complying with new variation margin requirements slated to become effective next March. The Protocol will permit counterparties to put contractual documentation in place with multiple counterparties quickly and revise existing collateral agreements to comply with the new requirements. ISDA Press Release

Miami International Securities Exchange

MIAX Proposes Complex Order Trading Rules

On August 18th, the SEC requested comments on a proposal filed by Miami International Securities Exchange LLC (“MIAX”) to adopt new rules to govern the trading of complex orders on MIAX. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 22, 2016.SEC Release 34-78620

Municipal Securities Rulemaking Board

SEC Approves MSRB’s Amended Proposal on Close-Out Procedures for Municipal Securities

On August 18th, the SEC granted accelerated approval to the Municipal Securities Rulemaking Board’s (“MSRB”) proposal to amend Rule G-12, on uniform practice, regarding close-out procedures for municipal securities. The SEC also requested comments on MSRB’s amendment to the proposed rule, which would shorten the period in which firms are required to resolve an inter-dealer fail from 20 calendar days to 10 calendar days, and would permit the buyer to grant the seller a one-time 10 calendar day extension. Comments on the amendment should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 22, 2016. SEC Release No. 34-78611

National Futures Association

NFA Revises Self-Examination Questionnaire

On August 15th, the National Futures Association (“NFA”) announced that it has revised its Self-Examination Questionnaire for members to use to monitor their operations for compliance with NFA Compliance Rules 2-9, 2-36 and 2-39. The Questionnaire now includes a Forex Electronic Trading Systems section in the Supplemental Questionnaire for Introducing Brokers (“IBs”) and technical clarifications within the financial section of the Supplemental Questionnaire for Commodity Pool Operators (“CPOs”). NFA Press Release


Nasdaq Proposes Generic Listing Standards for Managed Fund Shares

On August 18th, the SEC provide notice of a proposed rule change filed by The Nasdaq Stock Market LLC (“Nasdaq”) that would amend its rules to adopt generic listing standards for Managed Fund Shares. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 22, 2016. SEC Release No. 34-78616

Phlx Proposes Amendments to Rules on Openings Process for Option Series Trading

On August 16th, the SEC requested comments on NASDAQ PHLX LLC’s (“Phlx”) proposal to amend its rules relating to its openings process to reflect that Phlx conducts an electronic opening for all option series traded on Phlx using its trading system. The proposed rule changes would define certain terms relating to its opening process for option series, reorganize certain provisions in the rule, and make minor changes to the provision regarding eligible opening interest. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 22, 2016. SEC Release No. 34-78588

Phlx Proposes Exception to Mandatory Use of the FBMS for Certain Split Price Orders

On August 16th, the SEC provided notice of a proposed rule change filed by Phlx that would provide an exception to the mandatory use of the Floor Broker Management System (“FBMS”) to permit Floor Brokers to execute certain split price orders in the trading crowd rather than electronically and to facilitate these transactions. Phlx indicated it would use a surveillance process to confirm that the conditions of the exception are met. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 22, 2016. SEC Release No. 34-78593


SEC Takes More Time to Consider NYSE MKT’s Proposed Time Extension for U5 Filings

On August 17th, the SEC designated October 5, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE MKT LLC’s (“NYSE MKT”) proposal to amend its rules to extend the time within which a member, member organization, or an Amex Trading Permit (“ATP”) Holder must file a Uniform Termination Notice for Securities Industry Registration (“U5”). SEC Release No. 34-78598

NYSE Proposes Setting Maximum Fees for Delivery of Investment Company Shareholder Reports

On August 16th, the SEC requested comments on the New York Stock Exchange LLC’s (“NYSE”) proposal to adopt maximum fees that member organizations may charge in connection with the distribution of investment company shareholder reports pursuant to any electronic delivery rules adopted by the SEC in connection with its proposed expansion of reporting requirements for registered investment companies. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 22, 2016.SEC Release No. 34-78589

SEC Seeks Comments on NYSE MKT’s Proposed Changes to SPACs’ Eligibility for Complimentary Services

On August 16th, the SEC provided notice of a proposed rule change filed by NYSE MKT that would amend its company guide to adjust the entitlement to services of special purpose acquisition companies (“SPACs”). Under the proposal, NYSE MKT would exclude newly-listed SPACs from the definition of Eligible New Listings entitled to receive certain complimentary products and services and would instead extend services to SPACs that remain listed after meeting the Business Combination Condition. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 22, 2016. SEC Release No. 34-78586

NYSE Proposes Changes to Co-Location Services and Fees

On August 11th, the SEC requested comments on NYSE’s proposed rule change that would amend its co-location services by providing additional information regarding the access to trading and execution services and connectivity to data provided to users with local area networks available in the data center and by establishing fees relating to a user’s access to trading and execution services; connectivity to data feeds and to testing and certification feeds; access to clearing; and other services. Comments should be submitted on or before September 7, 2016. SEC Release No. 34-78556

Judicial Developments

Liquidating Agent’s 1933 Act Claims Are Not Time-Barred by Statute of Repose; Extender Statute Replaces All Such Preexisting Time Limitations.

The NCUA, liquidating agent for a failed credit union, sued defendants under the Securities Act of 1933 for making false and misleading statements in their RMBS offerings purchased by the credit union. The district court dismissed the NCUA’s claims as time-barred, holding that the Extender Statute did not supplant the 1933 Act’s Statute of Repose. On August 15th, the Ninth Circuit held that the NCUA’s claims were timely filed. The panel vacated the judgment and remanded, finding that the Extender Statute replaces all preexisting time limitations in any action by the NCUA as conservator or liquidating agent. NCUA

Venue Is Proper in EDNY Where Washington Securities Fraud Defendant Called and Emailed Potential Investors within That District

Washington defendants were found guilty of conspiracy to commit wire fraud and securities fraud, and of substantive securities fraud. The government appealed from an order vacating the substantive securities fraud conviction of one defendant who called and emailed potential investors in the EDNY, arguing that the evidence was sufficient to establish venue in the EDNY. On August 15th, the Second Circuit remanded with instructions to reinstate the conviction and resentence accordingly, holding that venue was proper in the EDNY as a defendant is not required to aid and abet the criminal activity occurring within the district of venue. Lange

In a Case of First Impression, Panel Interprets Statutory Definition of ‘Investment Adviser.’

Miller, who sold investors phony “promissory notes,” was sentenced to 10 years in prison for securities fraud. Miller argued that the district court improperly applied the Sentencing Guidelines “investment adviser enhancement” as he was not an “investment adviser” under the Investment Advisers Act. In a case of first impression, the Third Circuit had to interpret the statutory definition of “investment adviser.” The panel affirmed on August 12th, finding that Miller was an investment adviser, despite the fact that he failed to register as such, because he was in the business of providing securities advice. Miller

Industry News

Goldman Sachs to Roll Out Online Retail Banking Operation

On August 18th, DealBook reported that Goldman Sachs is set to unveil its online lender in October. Named “Marcus” after the company’s founder Marcus Goldman, the online retail banking operation will initially offer relatively small consumer loans.

Traders Are Urging U.S. Regulators to Overhaul Options Auctions

On August 17th, Bloomberg reported that traders are pleading with U.S. regulators to fix options auctions, which critics say could be removing liquidity from normal trading.

Big Banks Are Increasingly Using Arbitration to Stop Customers from Settling Disputes in Court

On August 17th, the New York Times reported that more big banks are using the fine print of checking account agreements to bar customer lawsuits. According to a Pew Charitable Trusts analysis, the share of 29 big banks that use so-called mandatory binding arbitration clauses, which require customers to settle disagreements through a private arbitration process instead of in a court, has risen over the last four years to 72% from 59%. In addition, a majority of the banks include language barring customers from joining class-action lawsuits.

Study Finds That SEC Enforcement Has Slowed

A Cornerstone Research report found that enforcement activity at the SEC has slowed. The agency has filed 508 enforcement actions through the first three quarters of fiscal 2016, which is an 8% decrease from last year. According to InvestmentNews on August 17th, the report also shows that the SEC has taken more actions related to previously filed cases so far in fiscal 2016 than at the same point in fiscal 2015, while the number of new actions has declined.