Insights from Winston & Strawn

The Securities and Exchange Commission (“SEC”) was busy on June 28, 2016, proposing rules and making announcements that, if ratified, will significantly increase regulatory burdens on registered investment advisers and investment companies. SEC Chief of Staff Andrew “Buddy” Donohue spoke at the end of June about the SEC’s work on a new proposed rule to the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which would require large investment advisers and investment companies to perform stress testing. Such stress testing is required of certain nonbank financial companies under Section 165(i) of the Dodd-Frank Act, so an SEC rule codifying it is expected to be introduced in the near future.

Additionally, and more imminently, the SEC released a proposed rule to the Advisers Act on June 28 that would require registered investment advisers to adopt and implement written business continuity and transition plans. Along with the proposed rules, the SEC released guidance for registered investment companies with respect to business continuity plans. These proposed rules and guidance should not come as a surprise to anyone in the industry. Following Hurricane Sandy, the SEC, the Commodity Futures Trading Commission, and the Financial Industry Regulatory Authority jointly reviewed a number of financial firms and provided guidance on best practices for business continuity and disaster preparedness plans based on their findings.

The proposed rules would require SEC-registered investment advisers to adopt and implement written business continuity and transition plans to address operational and other risks related to a significant disruption in the investment advisers’ operations such as natural disasters, cyber-attack, technology failures, the departure of key personnel, and other similar events. The proposal would also amend Rule 204-2 under the Advisers Act to require SEC-registered investment advisers to make and keep all business continuity and transition plans that are currently in effect or were in effect at any time within the past five years. While these proposed rules, if adopted, will possibly create an additional compliance burden for registered advisers, many advisers already have similar and likely compliant programs in place.

Feature: SEC Adopts New Rules for Resource Extraction Issuers Under Dodd-Frank

On June 27th, the SEC announced its adoption of rules requiring resource extraction issuers to disclose payments made to governments for the commercial development of oil, natural gas or minerals. The SEC had faced a June 27th adoption deadline after human rights group Oxfam America Inc. sued to speed up the rulemaking and a district court in Oxfam America Inc. v. SEC ordered the SEC to create an expedited rule schedule.

The final rules, mandated by the Dodd-Frank Act, are intended to further the statutory objective to advance U.S. foreign policy interests by promoting greater transparency about payments related to resource extraction. The Wall Street Journal noted that the final rules are expected to address the “resource curse,” by which principle oil and mineral wealth in resource-rich countries flows to government officials and the upper classes, instead of to low-income people.

Pursuant to the final rules, an issuer must disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the SEC under the Securities Exchange Act. The issuer must also disclose payments made by a subsidiary or entity controlled by the issuer. SEC Release No. 34-78169. Oil & Gas 360 noted that the disclosures will appear in Form SD, which will be required to be filed annually within 150 days of the issuer’s fiscal year end beginning with fiscal years ending after September 30, 2018. The SEC stated that as many as 755 companies could be affected by the requirements.

Forbes wrote that the SEC’s decision, which follows years of lobbying by transparency activists, was considered by key non-governmental organizations to be an “historic” step in the battle against corruption. Ian Gary, Associate Policy Director at Oxfam America, welcomed the rule. He released the following statement: “After six years, we are very pleased to see the SEC release final rules that align with those in other markets by requiring fully public, company-by-company, project-level reporting with no categorical exemptions. This is a huge victory for investors and for citizens in resource-rich countries around the world who wish to follow the money their governments receive from oil and mining companies.” According to Reuters, the rule will cover major corporations such as Exxon, Chevron and Shell, as well as state-owned companies in China and Brazil.

FINRA – Regulatory Matters at a Glance

Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.

Banking Agency Developments


OCC Releases CRA Evaluations for 19 National Banks and Federal Savings Associations

On July 6th, the Office of the Comptroller of the Currency (“OCC”) announced its release of a list of Community Reinvestment Act (“CRA”) performance evaluations that became public during the period of June 1, 2016 through June 30, 2016.  The list contains only national banks, federal savings associations, and insured federal branches of foreign banks that have received ratings.

OCC Publishes Interim Final Rule Adjusting Civil Money Penalties for Inflation

On July 1st, the OCC announced publication in the Federal Register of the interim final rule amending its rules of practice and procedure for national banks and federal savings associations to adjust the maximum amount of each civil money penalty (“CMP”) within its jurisdiction, pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The OCC is requesting comments on all aspects of the rule, specifically encouraging commenters to identify any technical issues raised by the rule, including identifying any CMPs that may have been unintentionally omitted. The adjustments apply only to penalties assessed on or after August 1, 2016, which is the effective date of this rule. Comments must be submitted by August 30, 2016.

OCC Reports Increases in Bank Trading Revenue for First Quarter of 2016

On June 30th, the OCC announced the release of its Quarterly Report on Bank Trading and Derivatives Activities: First Quarter 2016, which reported that trading revenue of U.S. commercial banks and savings associations rose to $5.8 billion in the first quarter of 2016 from $4.3 billion in the previous quarter.

Federal Reserve

FRB Formalizes Previously Announced One-Year Conformance Period Extension for Certain Volcker Rule Legacy Fund Investments

On July 7th, the Federal Reserve Board (“Board”) announced that it will extend until July 21, 2017 the conformance period for banking entities to divest ownership in certain legacy investment funds and terminate relationships with funds that are prohibited under the rule. This announcement formalizes the Board’s prior commitment to facilitate the orderly implementation of section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Board announced in 2014 that it would make this extension to provide for orderly divestitures and to prevent market disruptions. This is the final of the three one-year extensions that the Board is authorized to grant. Order.

FRB Releases Annual Determination of Aggregate Consolidated Liabilities of Financial Companies

On June 30th, the Board announced the release of its annual determination of the aggregate consolidated liabilities of financial companies as required by section 622 of the Dodd-Frank Act, which prohibits a financial company from combining with another company if the resulting company’s liabilities would exceed 10% of the aggregate consolidated liabilities of all financial companies.


Bureau Proposes Amendment to Annual Privacy Notice Requirement Under Gramm-Leach-Bliley Act

On June 27th, the Consumer Financial Protection Bureau (“CFPB”) proposed an amendment to Regulation P, which requires, among other things, that financial institutions provide an annual notice describing their privacy policies and practices to their customers.  The amendment would implement a December 2015 statutory amendment to the Gramm-Leach-Bliley Act providing an exception to this annual notice requirement for financial institutions that meet certain conditions.

Treasury Department Developments


FinCEN Issues Required Inflation Adjustments for Civil Monetary Penalties

On June 30th, the Department of Treasury’s Financial Crimes Enforcement Network issued its civil monetary penalty adjustment and table. Written comments must be submitted on or before the effective date of this interim final rule, which is August 1, 2016.

Securities and Exchange Commission

Proposed Rules

SEC Proposes Rule Requiring Investment Advisers to Adopt Business Continuity and Transition Plans

On June 28th, the SEC announced its proposal of a new rule that would require registered investment advisers to adopt and implement written business continuity and transition plans. The proposed rule is intended to guarantee that investment advisers have plans in place to address operational and other risks related to a significant disruption in the adviser’s operations in order to minimize client and investor harm. In addition to the proposed rule, SEC staff issued related guidance addressing business continuity planning for registered investment companies, including the oversight of the operational capabilities of key fund service providers. Comments should be received on or before September 6, 2016.

SEC Proposes Amendments to “Smaller Reporting Company” Definition

On June 27th, the SEC announced its vote to propose amendments that would increase the financial thresholds in the “smaller reporting company” definition. The proposal to update the definition would expand the number of companies that qualify as smaller reporting companies, therefore qualifying for certain existing scaled disclosures provided in Regulation S-K and Regulation S-X. SEC Chair Mary Jo White stated that “[r]aising the financial thresholds in the smaller reporting company definition is intended to promote capital formation and reduce compliance costs for smaller companies while maintaining important investor protections.” Comments should be received on or before August 30, 2016.

Speeches and Statements

SEC Chief of Staff Delivers Keynote Address at the InvestoRegulation Conference

On June 28th, Andrew J. Donohue, SEC Chief of Staff, delivered the keynote address, “The SEC at Home and Abroad,” at London’s InvestoRegulation Conference. Among other things, Donohue discussed the globalization of the securities markets, the importance of international engagement, enhancing asset management regulation, and addressing market structure.

White Delivers Keynote Address at the International Corporate Governance Network Annual Conference

On June 27th, SEC Chair Mary Jo White delivered the keynote address at the International Corporate Governance Network Annual Conference where she discussed the SEC’s role in corporate governance, board diversity, non-GAAP financial measures, and sustainability disclosures.

No-Action Relief

SEC Staff Grants 14e-1(a) Exemption so Purchaser May Make Tender Offer for Shares of Company Organized Under Laws of India

On June 28th, the SEC’s Division of Corporation Finance granted Marble II Pte. Ltd.’s request for an exemption from Rule 14e-1(a) under the Exchange Act in an effort to permit Marble and its affiliated entities to make a tender offer to purchase shares of Mphasis Limited, a public limited company organized under the laws of India. The Division noted, among other things, that Indian Takeover Regulations mandate a fixed 10-working day offer period that cannot be reduced or increased.

Other Developments

Sunshine Act Meeting to Be Held

On July 7th, the SEC announced that it will hold an Open Meeting on Wednesday, July 13th in its Washington, D.C. headquarters Auditorium, Room L-002. The agency will consider whether to adopt certain amendments and issue guidance relating to Regulation SBSR under the Securities Exchange Act of 1934; whether to propose amendments to rules under the Securities Exchange Act of 1934 regarding disclosure of order handling information; and whether to propose amendments to address redundant, duplicative, overlapping, outdated, or superseded disclosure requirements. In addition, the agency will vote on amendments to its Rules of Practice regarding administrative proceedings.

Office of the Investor Advocate Releases its Report on Objectives for FY 2017

On June 30th, the SEC’s Office of the Investor Advocate released its third annual Report on Objectives, which contains a summary of the Investor Advocate’s primary objectives for Fiscal Year 2017, beginning October 1, 2016.

Paul Dudek, Chief of Office of International Corporate Finance, Leaves Agency

On June 29th, the SEC announced that Paul Dudek, Chief of the Office of International Corporate Finance in the Division of Corporation Finance, has left the agency.

C. Dabney O’Riordan Named as Co-Chief of the Asset Management Unit

On June 28th, the SEC announced that C. Dabney O’Riordan has been named co-chief of the Division of Enforcement’s Asset Management Unit, a national specialized unit that focuses on misconduct by investment advisers, investment companies, and private funds. She joins Anthony Kelly as co-chief of the unit and succeeds Marshall Sprung, who left the agency in April.

SEC Advisory Committee on Small and Emerging Companies to Hold Meeting

On June 27th, the SEC announced that its Advisory Committee on Small and Emerging Companies will hold a public meeting on Tuesday, July 19, 2016, in Multi-Purpose Room LL-006 at its headquarters in Washington, D.C. The meeting will begin at 9:30 a.m. (EDT) and will be open to the public. Written statements should be received on or before July 15, 2016. SEC Release No. 33-10105.

Commodity Futures Trading Commission

Advisory Reminds Registrants of Compliance Requirements on Suspicious Activity Reporting, Economic Sanctions Programs

On July 6th, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued a Staff Advisory to remind futures commission merchants and introducing brokers of their compliance obligations to report suspicious activities to the Financial Crimes Enforcement Network. The Advisory also reminds all CFTC registrants of their compliance obligations regarding economic sanctions programs against countries and groups of individuals administered by the Office of Foreign Assets Control.

CFTC Adopts Amendments to Swap Data Recordkeeping and Reporting Requirements for Cleared Swaps

On June 27th, the CFTC adopted final regulations, effective July 27, 2016 (except for the removal of §45.4(b)(2)(ii), which is effective June 27, 2016), relating to swap data reporting in connection with cleared swaps for swap data repositories, derivatives clearing organizations, designated contract markets, swap execution facilities, swap dealers (“SDs”), major swap participants (“MSPs”), and swap counterparties who are neither SDs nor MSPs. These revisions clarify regulations to clearly delineate the swap data reporting requirements associated with each of the swaps involved in a cleared swap transaction. Additionally, these revisions leave the choice of SDR for each swap in a cleared swap transaction to the entity submitting the first report on such swap.

CFTC Amends Rule That Governs Adjustment of Civil Monetary Penalties for Inflation

On June 27th, the CFTC amended its rule that governs the maximum amount of civil monetary penalties, to adjust for inflation. This interim final rule, effective August 1, 2016, sets forth the maximum, inflation adjusted dollar amount for civil monetary penalties assessable for violations of the Commodity Exchange Act and CFTC rules, regulations and orders. The amended rule implements the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended.

Federal Rules Effective Dates

Click here to view table.

Exchanges and Self-Regulatory Organizations

Financial Industry Regulatory Authority

SEC Approves Rule Change to Reduce Clock Synchronization Tolerance for Computer Clocks Used to Record Events in NMS Securities, OTC Equity Securities

On July 7th, the SEC approved a new Clock Synchronization standard of 50 milliseconds applicable to computer clocks that are used to record certain events in NMS securities or OTC equity securities. Firms have six months from the August 15, 2016 effective date (until February 20, 2017) to apply the new 50 millisecond standard to impacted system clocks that capture time in milliseconds. Firms have 18 months from the August 15, 2016 effective date (until February 19, 2018) to apply the new standard to impacted system clocks that do not capture time in milliseconds.

SEC Approves Consolidated FINRA Rule 3210

On June 30th, the SEC approved FINRA’s proposed rule change to adopt a new, consolidated rule governing accounts opened or established by associated persons at firms other than the firm at which they are employed. The new rule, FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial Institutions), helps enable effective oversight of such accounts. The rule change takes effect on April 3, 2017.

International Swaps and Derivatives Association

GFMA, IIF, ISDA, JFMC and TCH Respond to the Basel Consultation on Leverage Ratio

On July 7th, the Global Financial Markets Association (“GFMA”), the Institute of International Finance (“IIF”), the International Swaps and Derivatives Association (“ISDA”), the Japan Financial Markets Council (“JFMC”) and The Clearing House (“TCH”) responded to the Basel Committee on Banking Supervision’s (“BCBS”) consultation on Revisions to the Basel III leverage ratio framework (Proposed Framework).

ISDA Sends Joint Letter in Response to CFTC’s Proposed Rule on Automated Trading

On June 28th, the ISDA, along with the FIA, FIA Principal Traders Group (“FIA PTG”), Managed Funds Association (“MFA”), and SIFMA’s Asset Management Group (“SIFMA AMG”) sent a joint letter to the CFTC in response to the reopened comment period on their proposed rule on regulation automated trading. The associations emphasized industry accord on the importance of risk controls and principles-based rulemaking. The letter urged the CFTC to separate the rulemaking into phases and to first address pre-trade risk controls, which have been proven to be the most effective safeguard for markets. ISDA Press Release.

Municipal Securities Rulemaking Board

MSRB Adds Economic Calendar to EMMA

The Municipal Securities Rulemaking Board (“MSRB”) announced on June 27th that it has added an economic calendar to its Electronic Municipal Market Access (EMMA®) website. Without having to leave the EMMA website, users can now easily access a calendar with dates and descriptions of key upcoming macroeconomic developments that could have an impact on the trading and issuance of municipal securities. MSRB Press Release.

Industry News

NYSE Request for New Market Volatility Rules Is Approved

The SEC said that the NYSE could allow stocks to open for trading on particularly volatile days, even in the absence of clear price disclosure that is usually required before trading opens. On July 6th, Reuters reported that the newly approved procedures would eliminate “Rule 48,” which sometimes slowed the ability of shares to start or resume trading. In an effort to allow trading to start more quickly, the new procedures would instead set up specific guidelines for when shares could open or be reopened after a trading halt.

SEC Delays Challenges to its Use of Administrative Proceedings

SEC victories in federal appeals courts have delayed recent challenges to its use of administrative proceedings to hear cases about possible violations. On July 5th, DealBook reported on this issue, which is just a part of a larger discussion over the SEC’s increased use of administrative proceedings to impose penalties that some have alleged gives the agency an improper “home court” advantage. Representative Jeb Hensarling, the Texas Republican who is also chairman of the House Financial Services Committee, presented a broad financial overhaul proposal last month that includes provisions that would essentially eradicate the use of in-house courts for cases. The proposal would put up enough barriers to pursuing a case before an in-house judge that it would guide most SEC enforcement actions to the federal district courts.