Insights from Winston & Strawn

The U.S. Commodity Future Trading Commission (“CFTC”) is holding a public roundtable on Cybersecurity and System Safeguards Testing on Wednesday, March 18, 2015. CFTC expects to address a variety of issues related to system safeguards testing requirements, including strategies to improve the protection of clearing organizations, future exchanges and swap data repositories. Market participants, certain government agencies with pertinent experience, industry associations and registered companies will be represented at the roundtable. Information on listening to the roundtable can be found here.

The CFTC roundtable is an illustration of an array of responses to a tumultuous 2014 for cybersecurity. The vulnerability of businesses and consumers across industries was highlighted after a series of high profile cyber­ attacks, including on large financial institutions, major retailers, an insurance company and in the entertainment industry. The public and private sector have responded in turn. Indeed, President Obama called for improved cybersecurity in his State of the Union address on January 20, 2015, urging Congress to pass legislation to improve computer protection, and recently signed an executive order encouraging developing central clearing houses for the government and companies to share cybersecurity­threat information.

The executive order was signed at the first­of­its kind Summit on Cybersecurity and Consumer Protection, hosted at Stanford University on February 13, 2015, where top executives from Wall Street to Silicon Valley (including CEOs of Apple Inc., Bank of America Corp., and MasterCard Inc.—to name a few) joined top officials at the Federal Bureau of Investigation, Department of Homeland Security and U.S. Secret Services to discuss combatting future cyber­attacks. Apple Inc. CEO Tim Cook offered remarks at the summit on privacy concerns characteristic to sharing cyber data and underscored the importance of collaboration between the government and private sector.

The Securities and Exchange Commission (“SEC”), for its part, recently released publications addressing cybersecurity at advisory and brokerage firms. SEC Chair Mary Jo White explained: “Cybersecurity threats know no boundaries. That’s why assessing the readiness of market participants and providing investors with information on how to better protect their online investment accounts from cyber treats has been and will continue to be an important focus of the SEC.” See the press release here.

Further, the Federal Financial Institutions Examination Council (“FFIEC”) released observations on cybersecurity based on an assessment of more than 500 community institutions’ preparedness to mitigate cybersecurity risks. See the FFIEC’s Cyber Security Assessment General Observations here.To that end, the FFEIC offered guidance to banking institutions, including taking immediate steps to: (i) engage their boards of directors; (ii) regularly discuss cybersecurity issues in meetings; (iii) maintain sufficient awareness of threats and vulnerabilities; (iv) maintain a dynamic control environment; (v) manage connections with third parties; and (vi) develop business continuity and disaster recovery plans that integrate cybersecurity scenarios.

Kristin Wickler

Feature: Venture Exchanges

Earlier this month, Securities and Exchange Commissioners Daniel M. Gallagher and Luis A. Aguilar both discussed “venture exchanges,” exchanges that would list the shares of smaller and emerging companies.

Gallagher envisions these exchanges as national securities exchanges free to structure trading however they see fit. They could, for example, hold periodic auctions instead of operating with continuous trading. View the text of Gallagher’s remarks here. But while Gallagher enthusiastically endorsed venture exchanges, Aguilar sounded a cautionary note, suggesting that prudence dictates an investigation into why previously established venture exchanges failed.

Aguilar also pointed out that some venture exchanges have suffered from low liquidity and, at times, high volatility, phenomena whose underlying causes should be examined. Aguilar further asked how can the Securities and Exchange Commission (“SEC”) encourage traders to execute transactions on venture exchanges, rather than in off­exchange venues? Can larger ticker sizes enhance liquidity by encouraging market maker activity and fostering research coverage? What steps can be taken to inform and protect investors? Should certain listing standards be required? View the text of Aguilar’s remarks here.

Last week, the U.S. Senate held hearing on venture exchanges. Stephen Luparello, Director of the SEC’s Division of Trading and Markets, provided an overview of the statutory structure in which the SEC’s review of venture exchange proposals must operate. In doing so he discussed the BX Venture Market created by NASDAQ OMX BX, Inc. The BX Venture Market includes rigorous vetting of listing applicants, such as background checks and independent investigators, enhanced surveillance of trading, and clear disclosure to investors that BX­listed securities differ from other exchange­listed securities because they generally present more risk. But, as Luparello notes, while the BX Venture Market was approved in 2011, it has yet to be launched.

Liquidity concerns are the apparent cause of the BX Venture Market’s failure to launch. To address those concerns Luparello suggests limiting all trading to particular times of the day or through particular mechanisms; attracting dedicated liquidity providers with a package of obligations for making a market in listed companies balanced by benefits for providing high­quality liquidity; and exploring different minimum tick sizes. View the text of Luparello’s testimony here.

Banking Agency Developments

OCC Workshops

The Office of the Comptroller of the Currency (“OCC”) will host a workshop in Indianapolis, Indiana on April 13­ 15, 2015 for directors of national community banks and federal savings associations. The Building Blocks for Directors workshop introduces new bank directors to the OCC’s approach to supervision and provides experienced bank directors with a review of core concepts. The workshop combines lectures, discussion, and exercises to provide practical information on the roles and responsibilities of board participation. OCC Press Release.

FDIC Publishes Winter Issue of Consumer Newsletter

On March 12th, the Federal Deposit Insurance Corporation (“FDIC”) published the latest issue of “FDIC Consumer News.” The issue features tips to help people make decisions concerning the financing of their home and autos. It also provides an overview of new options for using smartphones to pay at shops and restaurants, and contains articles on avoiding telemarketing scams, among other things. FDIC Press Release.

Federal Reserve Announces Results of Comprehensive Capital Analysis Review

On March 11th, the Federal Reserve Board (“FRB”) published the results of its Comprehensive Capital Analysis and Review. The FRB did not object to the capital plans of 28 bank holding companies. The Federal Reserve objected to the capital plans submitted by two institutions based on qualitative concerns. Federal Reserve Board Press Release.

Treasury Department Developments

FinCEN Designates Bank as Primary Money Launderer

On March 10th, the Financial Crimes Enforcement Network (“FinCEN”) named Banca Privada d’Andorra (“BPA”) a foreign financial institution of primary money laundering concern and issued a related Notice of Proposed Rulemaking (“NPRM”). If adopted as a final rule, the NPRM would prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable–through accounts for BPA, and for other foreign banks being used to process transactions involving BPA. The NPRM also proposes to require covered financial institutions to apply special due diligence to their correspondent accounts maintained on behalf of foreign banks to guard against processing any transactions involving BPA. Comments should be submitted on or before May 12, 2015. FinCEN Press Release.

CFPB Study of Arbitration Clauses

On March 10th, the Consumer Financial Protection Bureau (“CFPB”) released a study indicating that arbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions. The Dodd­Frank Act delegated to the CFPB the power to issue regulations on the use of arbitration clauses in consumer finance markets if the Bureau finds that doing so is in the public interest and for the protection of consumers, and if findings in such a rule are consistent with the results of the Bureau’s study. CFPB Press Release.

Securities and Exchange Commission

Chair White Discusses the Waiver of Automatic Disqualifications

On March 12th, SEC Chair Mary Jo White joined her fellow Commissioners in noting that the refusal to grant a waiver should not be used as an additional enforcement tool or as an unjustified means to discourage future misconduct. Each waiver request should be reviewed with the purpose of the disqualification in mind “to determine whether the entity or individual, going forward, can engage responsibly and lawfully in the activity at issue in the particular disqualification.” White believes that charging individuals, not the withholding of a waiver, is a more effect tool to deter future misconduct. White Remarks.

Government Service Golden Parachute Disclosure

On March 12th, Reuters reported the SEC’s Division of Corporation Finance is requiring three banks to include on their proxy ballots shareholder proposals which would require the banks to disclose the terms of “government service golden parachutes,” post­separation compensation granted to executives who leave the banks in order to work for the federal government. No­Action Denial.

Money Market Fund Statistics

On March 11th, the SEC’s Division of Investment Management released money market fund statistics as of January 31, 2015.

Commissioner Gallagher Discusses the Fixed Income Markets

On March 10th, SEC Commissioner Daniel M. Gallagher discussed reforming the fixed income markets, noting a growing lack of liquidity in those markets. Discrete steps exist which the agency can take to address these liquidity risks. They include facilitating electronic and on­exchange transactions of products and encouraging the standardization of primary offerings to facilitate secondary liquidity. Greater transparency concerning the fees charged to retail investors as well as accounting practices is also needed. Addressing the latter issue, Gallagher called for legislation that would require the use of Government Accounting Standards Board standards by municipal issuers. Gallagher Remarks.

Examination Sweeps

On March 10th, Financial Planning summarized the remarks of Jane Jarcho of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”). Jarcho said the SEC will conduct an examination sweep of how broker­ dealers and investment advisors provide retirement planning advice. OCIE is also in the preliminary stages of planning a sweep of how retirement advisors protect themselves against cybersecurity threats. Examination Sweeps.

Acting Investment Management Director Addresses Compliance Conference

On March 6th, Dave Grim, Acting Director of the SEC’s Division of Investment Management, discussed the staff’s recommendations regarding enhanced data reporting for both registered funds and investment advisers; controls for the identification and management of risks related to diverse portfolio composition; and the planning for market stress events, including when an adviser is no longer able to serve its clients. Grim Remarks.

Commodity Futures Trading Commission

New Date for DCO Roundtable Announced

The Commodity Futures Trading Commission (“CFTC”) has rescheduled to March 19, 2015, the public roundtable on issues related to the recovery and orderly wind­down of Derivatives Clearing Organizations. CFTC Press Release.

CFTC Market Risk Advisory Committee Meeting

The CFTC’s Market Risk Advisory Committee will meet on April 2, 2015 to discuss issues related to current risk management techniques employed by Derivatives Clearing Organizations and the evolving structure of the derivatives markets, particularly with respect to Swap Execution Facilities. Comments should be submitted on or before April 9, 2015. Meeting Notice.

ALJ Revival

On March 12th, Reuters summarized the remarks of Aitan Goelman who leads the CFTC’s enforcement division. Goelman said that the agency will revive its use of administrative proceedings to bring contested enforcement actions. To do so, the CFTC will borrow administrative law judges from other agencies. ALJ Revival.

CFTC Seeks Comment on Eight Remanded Swaps Rules

On March 10th the CFTC, as required by the U.S. District Court for the District of Columbia, requested comment on eight swaps­related rulemakings to address inadequacies in the CFTC’s cost­benefits analysis in its original rulemaking. The eight remanded rulemakings are: the Real­Time Reporting Rule; the Swap Data Recordkeeping and Reporting Rule; the Swap Entity Registration Rule; the Daily Trading Records, Risk Management, and Chief Compliance Officer Rules; the Entity Definition Rule; the Historical Swap Data Repository Reporting Rule; the Portfolio Reconciliation Rule; and the Swap Execution Facility Registration Rule. In its request for comments, the CFTC clarifies that the costs and benefits identified in the original rulemaking apply both to domestic and foreign swaps activities that are subject to the CFTC’s swaps rules. The agency solicits comments on whether there are cross­border costs or benefits associated with the remanded rules that differ from those associated with activities within the United States. Comments should be submitted on or before May 11, 2015. 80 FR 12555.

Federal Rules Effective Dates

March 2015 ­ May 2015

Federal Deposit Insurance Corporation

March 2, 2015            Transferred OTS Regulations Regarding Possession by Conservators and Receivers for Federal and State Savings Associations. 80 FR 5015.

                                      Removal of Transferred OTS Regulations Regarding Rules of Practice and Procedure and Amendments to FDIC Rules and Regulations. 80 FR 5009.

Federal Housing Finance Agency

April 10, 2015            Federal Home Loan Bank Capital Stock and Capital Plans. 80 FR 12753.

Federal Housing Finance Board

April 10, 2015            Federal Home Loan Bank Capital Stock and Capital Plans. 80 FR 12753.

Department of the Treasury

April 3, 2015              Department of the Treasury Acquisition Regulation; Technical Amendments.  80 FR 11595.

March 13, 2015         Documentation Related to Goods Imported From U.S. Insular Possessions. 80 FR 7537.

March 10, 2015         Government Securities Act Regulations: Large Position Reporting Rules. 79 FR 73407.

March 8, 2015            Extension of Import Restrictions Imposed on Certain Categories of Archaeological Material From the Pre­Hispanic Cultures of the Republic of El Salvador. 80 FR 12080.

Exchanges and Self­Regulatory Organizations

Chicago Board Options Exchange

Amendment Proposed to Allow Electronic Devices on Exchange Floor

On March 4th, the SEC provided notice of the Chicago Board Options Exchange’s filing of a proposed amendment to its rules regarding equipment and communication on the Exchange trading floor. The Exchange is proposing to delete the current rule on the topic, Exchange Rule 6.23, and to introduce more relevant rules governing the use of communication devices on the Exchange trading floor. The Exchange believes it is in the interest of Trading Permit Holders to allow electronic communications to and from the Exchange trading floor and that these amendments will eliminate confusion that may arise from outdated Exchange rules. Comments should be submitted on or before March 31, 2015. SEC Release No. 34­74438.

Direct Edge

Changes in Operation of Order Types Proposed

On March 4th, the SEC provided notice of EDGA Exchange’s and EDGX Exchange’s separately filed proposals to amend their respective Rules 11.6, 11.8, 11.9, 11.10 and 11.11 to clarify and to include additional specificity regarding the current functionality of their exchange systems, including the operation of order types and order instructions. Comments should be submitted on or before March 31, 2015.

Financial Industry Regulatory Authority

Amendment to Research Analyst Proposal Submitted

On March 12th, the SEC provided notice of the Financial Industry Regulatory Authority’s (“FINRA”) filing of Amendment No. 1 to a proposed rule change that would adopt NASD Rule 2711 (Research Analysts and Research Reports) as a FINRA rule, with several modifications. The proposal would also amend NASD Rule 1050 (Registration of Research Analysts) and Incorporated NYSE Rule 344 to create an exception from the research analyst qualification requirement. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of March 16. SEC Release No. 34­74488.

Proposed Discontinuance of OTC Bulletin Board Services is Withdrawn

On March 12th, the SEC advised that FINRA has withdrawn its proposed adoption of rules relating to quotation requirements for over­the­counter equity securities and deletion of the rules relating to the OTC Bulletin Board Service. SEC Release No. 34­74486.

Form U4

On March 10th, Law360 summarized two FINRA enforcement cases in which broker­dealers were fined for failing to timely update Form U4 filings to reflect garnishment orders. Untimely Update (subscription required).

SEC Approves Background Checks Proposal

On March 6th, FINRA announced the SEC approved FINRA’s proposed rule change to adopt NASD Rule 3010(e) (Qualifications Investigated) relating to background checks on registration applicants as FINRA Rule 3110(e) (Responsibility of Member to Investigate Applicants for Registration) in the consolidated FINRA rulebook. The SEC also approved FINRA Rule 3110.15 (Temporary Program to Address Underreported Form U4 Information), which establishes a temporary program that will issue a refund to members of Late Disclosure Fees assessed for the late filing of responses to Form U4 Question 14M, subject to specified conditions. FINRA Rule 3110(e) becomes effective on July 1, 2015. FINRA Rule 3110.15 became retroactively effective on April 24, 2014, and it will automatically sunset on December 1, 2015. FINRA Regulatory Notice 15­05.

ICE Clear

Revisions to Treasury Operations Policies and Procedures Approved

On March 6th, the SEC approved ICE Clear Credit’s proposed revisions to its Treasury Operations Policies and Procedures to provide for the use of a Federal Reserve Account, to provide for the use of a committed repurchase facility, and to provide for U.S. dollar and Euro investment guidelines for use by outside investment managers. SEC Release No. 34­74456.

International Securities Exchange

Disapproval Proceedings Instituted for Proposed Modifications to Opening Process

On March 10th, the SEC instituted proceedings to determine whether to approve or disapprove the International Securities Exchange’s proposal to: (1) clarify and codify existing functionality within the trading system regarding the procedures for initiation of the opening process, and (2) modify the manner in which the Exchange’s trading system opens trading at the beginning of the day and after trading halts. The Exchange also proposes to amend its opening rotation process. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of March 16. Rebuttal comments should be submitted 35 days after publication. SEC Release No. 34­74465.


Generic Listing Standards for Managed Fund Shares Proposed

On March 4th, the SEC provided notice of NYSE Arca’s filing of a proposed amendment to NYSE Arca Equities Rule 8.600 to adopt generic listing standards for Managed Fund Shares. Under the Exchange’s current rules, a proposed rule change must be filed with the SEC for the listing and trading of each new series of Managed Fund Shares. The Exchange believes that it is appropriate to codify certain rules within Rule 8.600 that would generally eliminate the need for such proposed rule changes, which would create greater efficiency and promote  uniform standards in the listing process. Comments should be submitted on or before March 31, 2015.  SEC Release No. 34­74433.

The Option Clearing Corporation

Capital Plan Approved

On March 6th, the SEC approved The Options Clearing Corporation’s proposed amendment of its By­Laws and other governing documents, and adopting certain policies, for the purpose of implementing a plan for raising additional capital under which the options exchanges that own equity in OCC will make an additional capital contribution and commit to replenishment capital in support of OCC’s function as a systemically important market utility. SEC Release No. 34­74452.

Judicial Developments

Electronic Payment Likened to Paper Checks for TILA Purposes

On March 11th, a divided panel of the Seventh Circuit reversed the entry of summary judgment dismissing plaintiff’s Truth in Lending Act (“TILA”) claims. Plaintiff alleged NYCB Mortgage’s failure to credit her electronic mortgage payment on the day it was authorized violated TILA. The majority held that an electronic authorization for a mortgage payment entered on the mortgage servicer’s website is a “payment instrument or other means of payment.” TILA requires mortgage services to credit these authorizations when they reach the mortgage servicer. Because NYCB did not credit plaintiff’s account when her authorization reached it, NYCB was not entitled to summary judgment. Fridman v. NYCB Mortgage Co., LLC.

Whistleblower Strikes Out

On March 11th, the Second Circuit held that the SEC’s implementation of the Dodd­Frank Act’s whistleblower provisions was entitled to deference. Larry Stryker sought review of a SEC order denying his claim for a whistleblower award. He sought the award under the Dodd­Frank Act based on information he supplied to the SEC that it relied upon in a successful enforcement action. The SEC held that, because the information was submitted before enactment of the Dodd­Frank Act, petitioner did not qualify for an award.

SEC Rule 21F­4(b)(1)(iv) disqualifies information submitted prior to July 21, 2010, the date on which the Dodd­ Frank Act was enacted. Because that rule is reasonable and entitled to deference and because the information Stryker provided did not fall within Congress’s safe harbor for information supplied after enactment of the Dodd­ Frank Act but before the SEC adopted implementing rules, the SEC’s order denying the award was proper. Stryker v. SEC.

Investor Claims Against Mutual Fund’s Managers Are Reinstated

On March 9th, a divided panel of the Ninth Circuit reversed and remanded the dismissal of a class action lawsuit brought by shareholders of the Schwab Total Bond Market Fund. The shareholders allege the managers of the fund failed to adhere to the fund’s investment objectives as set forth in the trust managing the fund and in the registration documents filed with the SEC. The Court found that the adoption of these investment objectives created a contract that could only be changed by a shareholder vote and the alleged failure to adhere to those objectives stated a claim for breach of contract. Vacating dismissal of the fiduciary duty claim, the Court held that because the fund trustees owed a duty to the shareholders, the claim did not need to be brought as a derivative action by the fund. Finally, the Court held that the shareholders adequately alleged they were third­party  beneficiaries of the investment advisory contract between the fund and the investment advisor. Northstar Financial Advisors Inc. v. Schwab Investments.

Industry News

Commerzbank Pays $1.45 Billion to Settle Anti­Money Laundering Charges

On March 12th, Commerzbank AG and its U.S. branch, Commerzbank AG New York Branch (“Commerz New York”) have agreed to pay $1.45 billion and enter into a deferred prosecution agreement (“DPA”) with the Justice Department for violations of the International Emergency Economic Powers Act (“IEEPA”) and the Bank Secrecy Act (“BSA”). The bank also entered into settlement agreements with the Treasury Department’s Office of Foreign Assets Control and the Federal Reserve Board. In the DPA, Commerzbank admitted and accepted responsibility for its criminal conduct in violation of IEEPA and Commerz New York admitted its criminal conduct in violation of the BSA. In a related settlement with the New York County District Attorney’s Office, Commerzbank admitted it violated New York State law by falsifying the records of New York financial institutions.  Justice Department Press Release.

Mug Book

On March 12th, DealBook reported Utah will create the first registry for white­collar criminals. The registry will include an individual’s photo, name, date of birth, height, weight, and eye and hair color. Mug Book.

Justice Department Finds New Use for Old Statutes

On March 9th, DealBook Contributor Peter J. Henning discussed a new way the Justice Department may use long­standing criminal statutes to prosecute employees who disclose confidential information that isn’t used to engage in insider trading: the mail and wire fraud statutes. New Avenues.

Winston & Strawn Upcoming Events & Speaking Engagements

The Real Deal Webinar Series: Recent Trends and Legal Developments You Should Consider in 2015 ­ Part II

We are pleased to bring you the next webinar in The Real Deal series, which covers current trends, challenges, and legal topics pertinent to IP issues in M&A transactions. Webinar.