Effective as of April 15, 2016, the Hizballah Financial Sanctions Regulations, 31 C.F.R. part 566 (the “Sanctions”) were implemented by the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) pursuant to the Hizballah International Financing Preventions Act of 2015. The Sanctions may require United States financial institutions to close or restrict accounts held by certain foreign financial institutions.
The Sanctions generally prohibit a foreign financial institution from knowingly engaging in or facilitating (1) a significant transaction for the terrorist organization Hizballah (or for any individual or entity that is identified on OFAC’s Specially Designated Nationals and Blocked Persons List (the “SDN List”) as an agent, instrumentality or affiliate of Hizballah and the property of which are blocked pursuant to the International Emergency Economic Powers Act) (“Hizballah”), (2) a significant transaction of a person identified on the SDN List, the property and interest in property of which are blocked pursuant to the International Emergency Economic Powers Act (“IEEPA”) for acting on behalf or at the direction of, or being owned or controlled by Hizballah, (3) money laundering to carry out the foregoing activities, or (4) a significant transaction or providing significant financial services to carry out the foregoing activities.
“Facilitating” any prohibited activity may include: providing currency, financial instruments, securities or other transactions of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; providing other services of any kind; providing personnel; or providing software, technology, or goods of any kind.
In determining whether a transaction(s) is “significant,” the Secretary of the Treasury may consider the totality of the facts and circumstances, including the size, number, and frequency of the transaction(s); the type, complexity, and commercial purpose of the transaction(s); whether the transaction(s) is performed by or with approval of management (as opposed to clerical personnel) and whether the transaction(s) is part of a pattern of conduct or the result of a business development strategy; the proximity between the foreign financial institution and Hizballah; and the economic or other benefit conferred on Hizballah and whether the transaction contributes to international terrorism.
Upon a determination by the Secretary of the Treasury that a foreign financial institution knowingly engages in or facilitates any of the prohibited activities, the Secretary of the Treasury may impose strict conditions on the opening or maintaining of a correspondent account or payable-through account in the United States for that foreign financial institution, or prohibit a United States financial institution from opening or maintaining such an account for that foreign financial institution. Such conditions may include: prohibitions or restrictions on the types of transactions that may be processed through the account; monetary or volume limitations on transactions that may be processed through the account; requiring pre-approval from the United States financial institution for all transactions processed through the account; or prohibitions or restrictions on processing foreign exchange transactions through the account. Even if no such conditions are imposed, the Secretary may prohibit the opening or maintaining by a United States financial institution of a correspondent account or payable-through account in the United States for that foreign financial institution.
A person that violates the Sanctions may be subject to civil and criminal penalties. Civil penalties may not exceed the greater of $250,000 or twice the amount of the transaction that is the basis of the violation. A willful violation of the Sanctions may be punishable by a criminal penalty of up to $1,000,000 or up to 20 years’ imprisonment, or both.
In order to comply with the Sanctions, firms should carefully screen potential transaction counterparties for connections to individuals or entities connected to Hizballah and, in particular, persons specifically identified as such on the SDN List. Persons on the SDN List that fall within the definition of Hizballah under the Sanctions, or whose property and interests in property are blocked pursuant to IEEPA for acting on behalf or at the direction of, or being owned or controlled by Hizballah, are identified by a special reference to Hizballah at the end of their respective entries on the SDN List.
Feature: New DOJ Pilot Program
In an effort to encourage companies to self-report potential Foreign Corrupt Practices Act (“FCPA”) violations and promote transparency and accountability, the U.S. Department of Justice (“DOJ”) on April 5th unveiled a new one-year trial pilot program in the Fraud Section’s FCPA Unit that offers extensive discounts for companies that report and cooperate on foreign corruption violations. The pilot program applies only to FCPA matters brought by the Criminal Division’s Fraud Section.
Pursuant to the pilot program, which provides new guidance for prosecutors who are handling FCPA cases, companies that self-report FCPA violations and take other remedial steps may be eligible for a 50% reduction in sanctions. Such sanctions include a 50% reduction off the low end of the U.S. Sentencing Guidelines’ penalty range to companies that self-report FCPA violations; disclose all known facts; and remediate the bad acts, including disgorgement of any improper benefits. In some cases, the DOJ may even decide not to bring any charges at all.
Assistant Attorney General Leslie Caldwell, who heads the DOJ’s Criminal Division, explained that the pilot program “provides that if a company chooses not to voluntarily disclose its FCPA misconduct, it may receive limited credit if it later fully cooperates and timely and appropriately remediates – but any such credit will be markedly less than that afforded to companies that do self-disclose wrongdoing … By contrast, when a company not only cooperates and remediates, but also voluntarily self-discloses misconduct, it is eligible for the full range of potential mitigation credit.”
As for companies that do not voluntarily disclose their FCPA misconduct in accordance with the new guidance, the DOJ indicated that “the Fraud Section’s FCPA Unit will accord at most a 25% reduction off the bottom of the Sentencing Guidelines fine range.” Andrew Weissmann, the chief of the DOJ’s Fraud Section, added that this “… draws a clear distinction between credit that you can be eligible for voluntary self-disclosure as opposed to companies that may decide to wait to see if they get caught, and then cooperate.”
The pilot program became effective on April 5, 2016. At the end of the one-year pilot period, the Fraud Section will decide whether it will extend or amend the program.
Banking Agency Developments
OCC to Host Mutual Savings Association Advisory Committee Meeting
On April 14th, the Office of the Comptroller of the Currency (“OCC”) announced that it will host a public meeting of the Mutual Savings Association Advisory Committee (“MSAAC”) on Tuesday, May 3, 2016, beginning at 8:30 a.m. EST. The meeting will be held at the OCC office in Washington, D.C. The purpose of the MSAAC meeting is to advise the OCC on regulatory changes or other steps that the OCC may be able to take in order to ensure the continued health and viability of mutual savings associations and other issues of concern to mutual savings associations. OCC Press Release.
OCC Names New Deputy Comptroller for Compliance Risk
On April 13th, the OCC announced the selection of Donna Murphy for Deputy Comptroller for Compliance Risk. In this role, which is effective May 1st, Ms. Murphy will oversee development of policy and examination procedures relating to consumer, Bank Secrecy Act and anti-money laundering, and Community Reinvestment Act issues. She will also serve as a key advisor to the Committee on Bank Supervision and to the Comptroller of the Currency on compliance and CRA matters. OCC Press Release.
OCC Releases Its Risk Appetite Statement
On April 12th, the OCC released its Risk Appetite Statement, which sets boundaries of acceptable levels of risk in key areas of agency operations. Agency management and employees will use the statement to evaluate their decisions and actions during the course of overseeing national banks and federal savings associations as well as the execution of agency management functions such as human resources, procurement, and information technology. OCC Press Release.
OCC to Host Credit Risk Workshop in Texas and Offer First Operational Risk Workshop
On April 11th, the OCC will host two workshops in Corpus Christi, Texas, at the Omni Corpus Christi Hotel, May 17-18, including its first workshop on operational risk. The Credit Risk workshop on May 17th will focus on credit risk within the loan portfolio, such as identifying trends and recognizing problems, and will also cover the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change. The Operational Risk workshop on May 18th will focus on the key components of operational risk (people, processes and systems) and will also cover governance, third-party risk, vendor management, and cybersecurity. This is the first of six Operational Risk workshops scheduled for 2016. OCC Press Release.
Treasury Department Developments
FinCEN Director Delivers Speech at ACAMS AML and Financial Crimes Conference
On April 12th, Financial Crimes Enforcement Network (“FinCEN”) Director Jennifer Shasky Calvery delivered a speech at the ACAMS AML and Financial Crimes Conference, where she discussed money laundering through real estate. FinCEN Press Release.
CFPB Announces New Additions to Senior Leadership
On April 12th, the Consumer Financial Protection Bureau (“CFPB”) announced the addition of the following new members to leadership positions within the CFPB: Elizabeth Ellis will serve as the Deputy Associate Director for the External Affairs Division; Katherine Gillespie will serve as the Deputy Associate Director for the Consumer Education and Engagement Division; Seth Frotman will serve as the Student Loan Ombudsman and the Assistant Director for the Office for Students and Young Consumers; Grady Hedgespeth will serve as the Assistant Director for the Office of Small Business Lending Markets; Chris Johnson will serve as the Assistant Director for the Office of Consumer Response; and John Schroeder will serve as the Midwest Regional Director for the Office of Supervision Examinations. CFPB Press Release.
Securities and Exchange Commission
SEC Approves Final Business Conduct Standards for SBS Entities
At an opening meeting on April 13th, a divided Securities and Exchange Commission (“SEC”) voted to adopt final rules that establish business conduct standards and chief compliance officer requirements for security-based swaps (“SBS”) dealers and major swaps participants, as mandated by Title VII of the Dodd-Frank Act. Among other things, the final rules require SBS entities to abide by certain play-to-play restrictions; comply with certain requirements when acting as counterparties or advisors to special entities; make certain disclosures about the security-based swap, including material risks, characteristics, incentives and conflicts of interest; and designate a chief compliance officer who will undertake specific responsibilities. The final rules will be effective 60 days after publication in the Federal Register. The compliance date for most of the rules will be based on the compliance date of the registration rules for SBS entities. SEC Press Release. In supporting the final rules, SEC Chair Mary Jo White said the final rules demonstrate “a robust and workable approach to regulation” that takes care to avoid disruptions the SBS market. See also Stein Statement. According to a report in Law360, Commissioner Michael S. Piwowar dissented, objecting to the rules’ divergence from Commodity Futures Trading Commission (“CFTC”) rules governing SBS dealers.
Requests for Comment
SEC Seeks Input on Revisions to Business and Financial Disclosure Framework under Regulation S-K
The SEC published a concept release on April 13th that seeks input on how the Commission might modernize and enhance certain business and financial disclosure requirements under Regulation S-K. The concept release focuses specifically on the business and financial disclosures that companies provide in their periodic reports and seeks to assess whether these disclosure requirements provide adequate information to investors to make informed investment and voting decisions and whether any of these requirements are unnecessary or outdated. The release also requests feedback about potential improvements to the readability and navigability of company disclosures. Comments should be submitted within 90 days of publication in the Federal Register, which is expected shortly. SEC Press Release. SEC Chair Mary Jo White and Commissioners Stein and Piwowar all supported the issuance of the release, although Commissioner Stein called it a “tentative first step” toward improving the SEC’s disclosure framework due to its narrow scope. Commissioner Piwowar urged the Commission to focus only on material information as it considers revisions to its disclosure framework.
Speeches and Statements
White Makes Case for SEC’s 2017 Budget Request to Senate Appropriations Subcommittee
In testimony before the U.S. Senate Appropriations Subcommittee on Financial Services and General Government on April 12th, SEC Chair Mary Jo White indicated that the SEC’s budget request of $1.781 billion for Fiscal Year 2017 will be used to hire 250 additional staff and to improve the SEC’s information technology. White explained that the SEC would focus additional resources in core areas, including increased examination of investment advisers, development of technology, and the expansion of the Division of Enforcement’s investigative capabilities. White Testimony.
Technology and Innovative Cooperation Keys to Global Securities Regulation, Says White
In remarks at the International Institute for Securities Market Growth and Development on April 8th, SEC Mary Jo White discussed how technological tools and innovative methods of information sharing and cooperation among global regulators can assist the SEC and other agencies in keeping pace with the increasing size, sophistication and complexity of the securities markets. White Remarks.
Investor Advisory Committee Meeting
The SEC’s Investor Advisory Committee met on April 14th to discuss a recommendation of the Investor as Purchaser subcommittee regarding mutual fund cost disclosure and cybersecurity and related investor protection concerns, among other matters. SEC Chair Mary Jo White addressed the Committee by providing an update on recent SEC rulemaking activities related to security-based swap dealers and informing the Committee that the Division of Investment Management is working on a recommendation for a program of independent compliance assessments for registered investment advisers to supplement the investment adviser examination program. The Committee approved a recommendation from its subcommittee that the SEC consider requiring mutual funds to disclose actual dollar amount costs on customer account statements.
On April 14th, the SEC released and implemented EDGAR Form N-MFP1 XML Technical Specification (Version 1).
Marshall S. Sprung, co-chief of the Division of Enforcement’s Asset Management Unit, will leave the SEC in April, according to an announcement on April 11th. Sprung has worked at the SEC for 13 years and served in his current role as co-chief of the Asset Management Unit for the last two years. SEC Press Release.
Commodity Futures Trading Commission
New Director of the Office of Customer Education and Outreach Is Announced
On April 13th, CFTC Chairman Timothy Massad announced that Dan Rutherford has joined the agency as its first Director of the Office of Customer Education and Outreach. CFTC Press Release.
Market Risk Advisory Committee Announces Agenda for April 26th Public Meeting
On April 11th, the CFTC’s Market Risk Advisory Committee (“MRAC”) announced the agenda for the public meeting that will be held on April 26, 2016 at CFTC’s headquarters in Washington, D.C. CFTC Press Release.
DMO Issues Further Actions Concerning Implementation of the Ownership and Control Final Rule; DMO Also Issues No-Action Letter on Masking of Certain Information Reportable Under OCR Final Rule
On April 8th, the CFTC’s Division of Market Oversight (“DMO”) issued a no-action letter (CFTC Letter No. 16-32) and related guidance regarding the ownership and control final rule (“OCR Final Rule”), which requires the electronic submission of trader identification and market participant data on new and updated reporting forms. CFTC Letter 16-32 extends certain relief previously provided under CFTC Letter No. 15-52. For reference, DMO has summarized the no-action relief provided by this letter on an accompanying PowerPoint chart. Finally, DMO also issued related Guidance, which responds directly to questions raised by reporting parties regarding the terms “owner” and “controller,” as used in these questions. CFTC Press Release 16-32. On the same day, the DMO also issued a no-action letter (CFTC Letter No. 16-33) regarding the masking of certain information reportable under the OCR Final Rule. CFTC Press Release 16-33.
Federal Rules Effective Dates
Click here to view table.
Exchanges and Self-Regulatory Organizations
SEC Approves BATS Exchanges’ Early Trading Session
On April 13th, the SEC approved Bats BZX Exchange, Inc.’s (“BZX”) and Bats BYX Exchange, Inc.’s (“BYX”) separately proposed rule amendments to create a new Early Trading Session that will operate between 7:00 am and 8:00 am Eastern time and adopt three new Time-In-Force instructions to facilitate the handling of orders during the new Early Trading Session.
Financial Industry Regulatory Authority
SEC Designates Longer Period to Consider FINRA’s Proposed Margin Requirements for Covered Agency Transactions, Seeks Comments on Amendment
On April 11th, the SEC designated June 16, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding the Financial Industry Regulatory Authority’s (“FINRA”) proposal to amend its rules to establish margin requirements for covered agency transactions. The SEC also requested comments on FINRA’s second amendment to the proposal. Comments should be submitted on or before May 2, 2016. SEC Release No. 34-77579.
SEC Seeks Comments on FINRA’s Amendment to Proposed Capital Acquisition Broker Rules
On April 11th, the SEC provided notice that FINRA filed an amendment to its proposed rule change to adopt a separate set of rules that would apply exclusively to firms that meet the definition of “capital acquisition broker.” The amendment clarifies that the definition of “capital acquisition broker” does not include any broker or dealer that effects securities transactions that would require the broker dealer to report the transaction under FINRA Rules 6300 Series, 6400 Series, 6500 Series, 6600 Series, 6700 Series, 7300 Series or 7400 Series. Comments on the amendment should be submitted on or before May 6, 2016. SEC Release No. 34-77581.
FINRA Gains Approval of Proposed 50 Millisecond Clock Synchronization Standard
On April 8th, the SEC approved FINRA’s proposed rule change to reduce the synchronization tolerance for computer clocks that are used to record events in NMS Securities, including standardized options and OTC Equity Securities, from one second to 50 milliseconds. The rule amendment includes a phased implementation, requiring firms with systems that capture time in milliseconds to comply with the new standard within six months of the effective date, which will be published by FINRA within 90 days of SEC approval. Firms without systems that capture time in milliseconds will have 18 months following the effective date to comply. SEC Release No. 34-77565.
International Securities Exchange
ISE Mercury Proposes New Market Wide Risk Protection Measures
On April 8th, the SEC requested comments on ISE Mercury, LLC’s (“ISE Mercury”) proposed rule change that would introduce two mandatory activity-based risk protections to protect members from entering or executing orders at a rate that exceeds predefined thresholds and risk settings. Comments should be submitted on or before May 5, 2016. SEC Release No. 34-77569.
International Swaps and Derivatives Association
ISDA Releases Document on Variation Margin Requirements for Non-Cleared Derivatives
On April 14th, the International Swaps and Derivatives Association (“ISDA”) published the 2016 Credit Support Annex for Variation Margin, a document to help market participants implement the non-cleared derivatives margin rules developed by the Basel Committee on Banking Supervision. The document, which is for use with New York law, is the first in a series of documents the ISDA plans to produce to assist market participants in various jurisdictions in complying with the rules concerning variation margin obligations, which will become effective on March 1, 2017. ISDA Press Release.
ISDA Announces Election of Ten Board Members
On April 14th, the ISDA elected three new directors and re-elected seven directors at its Annual General Meeting in Tokyo. The three new directors are John Feeney of National Australia Bank, Benjamin Jacquard of BNP Paribas, and Hideo Kitano of Nomura Securities Co., Ltd. ISDA Press Release.
ISDA Recommends Entity-Based Approach to Derivatives Trade Reporting
On April 13th, the ISDA, along with 12 other trade associations, published a paper that recommends the global adoption of an entity-based reporting framework for derivatives trades. The paper advocates for an approach in which responsibility for reporting falls to one counterparty via an automated hierarchy process on the grounds that this framework would improve data quality, promote consistency in reporting standards, reduce operational complexity, cut costs, and eliminate the reporting burden on end users. ISDA Press Release.
ISDA Revises EMIR Classification Letter
On April 13th, the ISDA published a revised classification letter that counterparties may use to comply with regulatory requirements under the European Market Infrastructure Regulation (“EMIR”), including the obligation to notify other counterparties of their status for clearing. The ISDA amended the classification letter to align the definition of “Category 1 entity” to the one used in the final regulatory technical standards (“RTS”) on G-4 interest rate products and to permit entities to make classifications in respect of the draft RTS for European economic area rates and the RTS on credit default swap (“CDS”) index classes. ISDA Press Release.
ISDA Issues Information Statement on SFTR
On April 13th, the ISDA and four other industry associations released an information statement on the European Union’s Securities Financing Transactions Regulation (“SFTR”), which will become effective on July 13, 2016. The information statement informs market participants of the general risks and consequences involved in entering a title transfer arrangement or granting a right to reuse collateral under a security arrangement; participants can tailor the statement to their specific circumstances to comply with SFTR requirements to inform counterparties of these risks. ISDA Press Release.
NASDAQ OMX Group
SEC Takes Additional Time to Consider NASDAQ’s Proposed Rule Amendments on Eligible Order Attributes for the Opening Cross
On April 12th, the SEC designated May 30, 2016, as the date by which it will approve, disapprove or institute disapproval proceedings regarding The NASDAQ Stock Market LLC’s (“NASDAQ”) proposal to amend Rules 4702 and 4703 to harmonize the treatment of Orders with a Pegging Attribute or that are designated for routing, which are eligible to participate in the Opening Cross, along with other technical amendments. SEC Release No. 34-77592.
NYSE Modifies Registration and Examination Requirements for Floor Clerks
The New York Stock Exchange LLC (“NYSE”) announced changes to the registration and examination requirements for NYSE Trading Floor Clerks in an Information Memo published on April 12th. According to the Memo, the NYSE has replaced the Trading Assistant registration with the Floor Clerk—Equities registration, eliminated the Series 25 exam, and renamed the Series 15 exam as the Series 19 exam. Effective April 18, 2016, individuals who wish to qualify as Floor Clerks will need to pass the Series 19 exam in addition to meeting other requirements. NYSE Information Memo 16-05.
Investors Are Slow to Act on Climate Change
Despite being more conscious of risks to their portfolios, investors continue to be slow to act on climate change. On April 14th, Reuters reported that many fund managers are still unsure about managing climate change risks and how that issue fits into their fiduciary responsibility. Reuters.
Federal Regulators Reject Plans of Big U.S. Banks for Averting Another Taxpayer Bailout
On April 13th, the Federal Reserve and Federal Deposit Insurance Corporation (“FDIC”) said that five of the country’s largest banks still do not have credible plans for winding down their operations without taxpayer help if they start to fail. On April 13th, The Washington Post reported that the rejection of the plans, or “living wills,” submitted by the banks appears likely to fuel mainstream concerns that U.S. banks are still “too big to fail.” According to Reuters, the banks have until October 1st to resubmit their plans with serious “deficiencies” corrected, or face stricter regulations such as higher capital requirements or limits on business activities. The requirement for a living will was part of the Dodd-Frank Wall Street reform legislation passed in the wake of the 2007-2009 financial crisis, when the U.S. government spent billions of dollars on bailouts to keep big banks from failing and destroying the U.S. economy.