Insights from Winston & Strawn

On September 29, 2015, SEC Chair Mary Jo White spoke to mark the 75th anniversary of the introduction of the Investment Company Act and the Investment Advisers Act (together, the 1940 Acts), which passed both houses of Congress unanimously in 1940 and have provided the regulatory foundation upon which the Securities and Exchange Commission (the Commission) has developed rules and regulations to adapt to evolving investment markets ever since. Highlights of her remarks follow.  

The 1940 Acts were designed to protect investors from abuses that had arisen in the investment industry, and were the product of a joint effort between the Commission and representatives of the asset management industry. The architects of the 1940 Acts hoped that such legislation would enable the investment industry to diversify small investors’ risks and provide an important source of capital for small business ventures. As the number and type of investment funds and investment advisers have grown substantially during the intervening years – the Commission oversees registered investment companies with a combined $18.8 trillion in assets and registered investment advisers with approximately $67 trillion in regulatory assets under management – the 1940 Acts have continued to provide crucial regulation of these entities.  

The Investment Company Act is the primary statute that regulates investment funds and incorporates principles of “full and fair” disclosure that are the foundation of our securities laws, but also regulates investment funds through specific prohibitions and governance requirements (and also gives the Commission the discretion to grant exemptions from requirements). The Investment Advisers Act, while imposing relatively few specific prohibitions, regulates principally through its anti-fraud provisions and through the application of fiduciary duties, requiring disclosures that give investors information they require in order to make informed investment decisions. Over the years, the Commission has used these fiduciary duty requirements to address a wide range of problematic practices of investment advisers, including the inadequate disclosure of conflicts of interest related to compensation, expenses and loans to affiliates, and the distribution of misleading or false advertising materials.  

The Commission has adapted, and will continue to adapt, its regulatory programs in response to an evolving asset management landscape – regulating funds and advisers while at the same time seeking to allow for innovation in the market. Recent developments from the Commission include proposals to enhance data reporting by investment companies and advisers and to require open-end funds to enhance their liquidity risk management. Additional recommendations and proposals from the Commission are also planned by year-end to address items such as (1) the use of derivatives by funds, including measures designed to appropriately limit the leverage these instruments may create, (2) transition planning for investment advisers, (3) annual stress tests for large investment advisers and investment funds, and (4) the imposition of uniform fiduciary duties for all investment advisers and broker-dealers.

Feature: Financial (and Other) Firms Need to Pay Attention to Recent FCPA Actions

A high priority for the Securities and Exchange Commission (“SEC”), especially recently, has been enforcement of the Foreign Corrupt Practices Act (“FCPA”). It all began in 2010, when the SEC’s Enforcement Division created a specialized unit to further develop its enforcement of the FCPA, which prohibits U.S. companies from bribing foreign officials for government contracts and other business. See here for a comprehensive list of SEC FCPA enforcement actions.

The most recent SEC enforcement of the FCPA occurred on September 28, 2015, when the SEC charged a Tokyo-based conglomerate with violations of the FCPA. The SEC contended that the conglomerate inaccurately recorded improper payments to the African National Congress (“ANC”), South Africa’s ruling political party, in connection with contracts to build two multi-billion dollar power plants. Without admitting or denying the allegations, the conglomerate agreed to a settlement requiring it to pay a $19 million penalty, subject to court approval.

Discussing the SEC action against the conglomerate, Andrew J. Ceresney, Director of the SEC’s Enforcement Division, said that the conglomerate’s “lax internal control environment enabled its subsidiary to pay millions of dollars to a politically-connected front company for the ANC to win contracts with the South African government … [the conglomerate] then unlawfully mischaracterized those payments in its books and records as consulting fees and other legitimate payments.”

In another recent SEC action enforcing the FCPA, the SEC on August 18, 2015 announced that it charged a global investment company with violating the FCPA by giving valuable student internships to family members of foreign government officials that were affiliated with a Middle Eastern sovereign wealth fund. Without admitting or denying the findings, the investment company agreed to pay $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty.

Referring to the SEC action against the investment company, Andrew J. Ceresney said that “[t]he FCPA prohibits companies from improperly influencing foreign officials with ‘anything of value,’ and therefore cash payments, gifts, internships, or anything else used in corrupt attempts to win business can expose companies to an SEC enforcement action … [the investment company] deserved significant sanction for providing valuable student internships to family members of foreign officials to influence their actions.”

Kara Brockmeyer, chief of the SEC Division of Enforcement’s FCPA unit, issued the following statement after the settlement with the investment company was announced: “Financial services providers face unique corruption risks when seeking to win business in international markets, and we will continue to scrutinize industries that have not been vigilant about complying with the FCPA.”

On September 4, 2015, Bailey McCann, writing for Institutional Investor, suggested that this action against the investment company shows that banks and asset managers need to look more closely at their business to guarantee compliance with the FCPA. McCann concluded that, while the investment company’s violation and settlement were basically minor, this case is notable as it was the first one that was brought against a bank under the FCPA. In addition, McCann found this case to be notable as it focused on hiring practices. As a result of these findings, McCann concluded that this action offers a glimpse into a new area of enforcement that financial firms cannot ignore.

DealBook found that the SEC settlement with the investment company shows Wall Street that its “business practices are being put under the uncomfortable glare of the SEC and the Justice Department, which are using the law aggressively to police practices that many might consider standard fare for financial firms trying to win business.” In conducting a survey of this and other recent SEC FCPA enforcement actions, DealBook concluded that “[c]urrying favor with clients may be nothing new, but when a client is connected to a government official, there is a risk that any benefits violate the FCPA. Like it or not, the law has grown into another tool to scrutinize Wall Street.”

Finally, ACFE Insights listed several “takeaways” from the action against the investment company:

  1. Bribery is not limited to cash payments. The FCPA prohibits companies from offering anything of value to improperly influence foreign officials, including jobs or internships.
  2. Since the SEC has signaled that hiring practices will be subject to scrutiny, companies must have hiring policies and procedures that take into account FCPA risks. These policies and procedures should include appropriate FCPA training for all employees. Human resources personnel should be trained to flag unusual hires, which should then be reviewed by legal or compliance staff.
  3. As shown by the actions of the investment company, broad FCPA policies are insufficient. Businesses should take care to specifically tailor internal controls to the corruption risks faced by their individual business.

Other Recent FCPA Enforcement Actions

In other recent FCPA enforcement actions, the SEC announced in July 2015 that it charged an infant formula manufacturer with violating the FCPA when its Chinese subsidiary made improper payments to health care professionals at government-owned hospitals to recommend the company’s product to new and expectant mothers. Without admitting or denying the allegations, the manufacturer agreed to pay $12 million to settle the charges. And, in May 2015, the SEC announced that it charged a global resources company with violating the FCPA when it sponsored the attendance of foreign government officials at the Summer Olympics. Without admitting or denying the findings, the global resources company agreed to pay a $25 million penalty to settle the charges. Referencing this action, Andrew Ceresney stated that the  global resources company “footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavors,” adding that  the global resources company “recognized that inviting government officials to the Olympics created a heightened risk of violating anti-corruption laws, yet the company failed to implement sufficient internal controls to address that heightened risk.”


It is becoming increasingly clear that FCPA enforcement has been and remains a top enforcement priority for the SEC. As a result, almost all companies, regardless of size or whether the company is publicly or privately held, need to step up their compliance procedures so that they avoid becoming an SEC target.

FINRA – Regulatory Matters at a Glance

FRB Announces Community Depository Institutions Advisory Council Members

On September 29th, the Federal Reserve Board (“FRB”) announced the president, vice-president and other members of the 2016 Community Depository Institutions Advisory Council (“CDIAC”). The CDIAC advises the FRB regarding areas of interest to community depository institutions, including the economy and lending conditions. FRB Press Release.

OCC Updates Bank Accounting Advisory Series

On September 29th, the Office of the Comptroller of the Currency (“OCC”) published an update to the Bank Accounting Advisory Series. The series provides guidance regarding the OCC’s interpretation of generally accepted accounting principles as they apply to national banks and federal savings associations. Among other things, the update includes frequently asked questions and answers regarding troubled debt restructurings, other real estate owned, and push down accounting. OCC Press Release.

FDIC Publishes Updated Global Capital Index

On September 28th, Thomas Hoenig, Vice Chair of the Federal Deposit Insurance Corporation (“FDIC”), released the semi-annual update of the Global Capital Index. The Index illustrates the capital ratios for Global Systemically Important Banks by using International Financial Reporting Standards to measure tangible equity against a more complete reporting of balance sheet assets. The index showed that the largest financial firms continued to overstate the capital available to absorb losses relative to the total balance sheet. FDIC Vice Chair Thomas Hoenig encouraged these firms to show improvement in building loss-absorbing capital and less leveraged funding. Hoenig Statement.

OCC Releases Supervisory Priorities for 2016

On September 25th, the OCC issued its bank supervision operating plan for fiscal year 2016. The plan establishes supervisory priorities for the fiscal year, including business model and strategy changes; compliance; credit risk and loan underwriting; cybersecurity and resiliency planning; and interest rate risk. OCC Press Release.

Treasury Department Developments

CFPB Reports Student Loan Servicing Failures, Issues Joint Statement of Principles with Treasury and DOE

On September 29th, the Consumer Financial Protection Bureau (“CFPB”) published a report delineating widespread failures in the servicing of student loans. Based on information from both federal and private student loan borrowers, the report describes loan servicing practices that have the potential to create obstacles to repayment and other problems for consumers. CFPB Press Release. On September 29th, the Departments of Treasury and Education and the CFPB issued a Joint Statement of Principles on Student Loan Servicing, which provides a framework to improve student loan servicing practices. Among other things, the statement recommends creating consistent, industry-wide standards; building coordination among agencies to hold servicers accountable; providing borrowers with clear, timely information; and improving transparency by making student loan performance data publicly available. Joint Agency Press Release.

Treasury Department Announces Additional Bond Funding through Community Development Financial Institutions Guarantee Program

On September 29th, the Treasury Department’s Community Development Financial Institutions (“CDFI”) Fund announced that its Bond Guarantee Program guaranteed $327 million through nine additional bond loans during fiscal year 2015. The Bond Guarantee Program distributes bond proceeds to provide long-term, fixed capital for projects in low-income and underserved communities. Treasury Department Press Release.

Treasury Department Publishes Quarterly Report regarding Small Business Credit Program

On September 28th, the Treasury Department published a Quarterly Report regarding the State Small Business Credit Initiative’s (“SSBCI”) efforts to assist small businesses in accessing capital. According to the report, the program is responsible for the deployment of over $1.2 billion in funds to small businesses through state programs that support private-sector lending to small businesses. Treasury Department Press Release.

FinCEN Withdraws Proposed Rule Requiring Lebanese Bank to Take Anti-Money Laundering Measures

On September 28th, the Financial Crimes Enforcement Network (“FinCEN”) gave notice that it is withdrawing the rule it proposed on February 17, 2011, that would impose the fifth special measure against Lebanese Canadian Bank SAL as a financial institution of primary money laundering concern. The proposed rule will be withdrawn upon publication of the notice in the Federal Register. FinCEN Notice.

Securities and Exchange Commission

Effectiveness of Regulation S-X Disclosure Requirements

On September 25th, the SEC published a request for comment on the effectiveness of financial disclosure requirements in Regulation S-X.  The request for comment focuses on the requirements for the form and content of financial disclosures that companies must file with the Commission about acquired businesses, affiliated entities, and guarantors and issuers of guaranteed securities. The request for comment is part of the Disclosure Effectiveness Initiative, which is a broad-based staff review of the disclosure requirements and the presentation and delivery of the disclosures. Comments should be submitted within 60 days after publication in the Federal Register, which is expected shortly. SEC Press Release.

Public Statements

Commissioners Gallagher and Piwowar Dissent from SEC Opinion in Lucia Opinion

On October 2nd, Commissioner Daniel M. Gallagher and Commissioner Michael S. Piwowar published their dissent from the SEC opinion in In the Matter of Raymond J. Lucia Companies, Inc. and Raymond J. Lucia, Sr., in which the respondents touted an approach called “Buckets of Money,” named for a re-balancing strategy. The commissioners found that the SEC majority took a relatively straightforward set of facts and needlessly engaged in “rulemaking by opinion.”

Opening Remarks at the 75th Anniversary of the Investment Company Act and Investment Advisers Act

On September 29th, the SEC published SEC Chair Mary Jo White’s opening remarks that she gave at the 75th anniversary of the Investment Company Act and Investment Advisers Act. In her speech, Chair White noted that, while the next 75 years of asset management will certainly hold many challenges, the drafters of the Investment Company Act and Investment Advisers Act devised a regulatory structure with a broad and sturdy foundation. Chair White added that the SEC is steadfast in protecting the core ideals of protecting the investor while also maintaining the intended flexibility of the Acts. Opening Remarks.

Statement Regarding Security-Based Swap Rules

On September 25th, SEC Commissioner Daniel M. Gallagher and SEC Commissioner Michael S. Piwowar issued a statement regarding SEC Commissioner Luis A. Aguilar’s statement calling for the Commission to complete its rules governing the security-based swap market.  Public Statement.

Other Developments

Office of Inspector General Publishes ‘Improvements Needed in the Division of Enforcement’s Oversight of Fund Administrators.’

On September 30th, the SEC announced the Office of Inspector General’s (“OIG”) publication of “Improvements Needed in the Division of Enforcement’s Oversight of Fund Administrators.” The report details the results of the OIG’s audit of the SEC’s Division of Enforcement’s oversight of fund administrators used in the distribution process. The report contains three recommendations for corrective action that, if fully implemented, should help the SEC to improve oversight of fund administrators, comply with applicable laws and agency policy and requirements, and ensure that goals and objectives are met. OIG Report.

SEC Is Holding its Equity Market Structure Advisory Committee Meeting on October 27th

On September 29th, the SEC announced that its Equity Market Structure Advisory Committee will hold its second meeting on October 27, 2015 at 9:30am Eastern time. The meeting will focus on two market structure topics: Rule 610 of SEC Regulation NMS and the regulatory structure of trading venues. SEC Press Release.

Operation Plan in the Event of a Government Shutdown

On September 25th the SEC published its Operation Plan for operating in the event of a lapse in appropriations that results in an SEC shutdown. The plan addresses a total shutdown, not a partial shutdown due to the Agency having funds available, but not enough to maintain full operations over a full quarter. In the event of an actual shutdown, supplemental government-wide guidance issued by the Office of Management and Budget, the Office of Personnel Management, and the General Services Administration will also apply.

Commodity Futures Trading Commission

CFTC Finalizes Rule Repealing Exempt Commercial Markets and Boards of Trade

On October 2nd, the Commodity Futures Trading Commission (“CFTC”) issued a final rule removing part 36 regulations, which had established exempt boards of trade and exempt commercial markets, but were eliminated from the Commodity Exchange Act (“CEA”) by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The rule is effective October 2, 2015. CFTC Final Rule.

CFTC Extends No-Action Relief Granted to Eurex Clearing AG and Its U.S. Clearing Members

On September 30th, the CFTC’s Division of Clearing and Risk issued a no-action letter temporarily extending the relief it granted previously to Eurex Clearing AG and its U.S. clearing members until January 31, 2016. The Division stated that it would not recommend enforcement action against Eurex Clearing AG for failing to register as a derivatives clearing organization (“DCO”) or against its U.S. clearing members for failing to clear interest rate swaps through a registered exempt DCO. Eurex Clearing requested the relief during the review period for consideration of its application for registration as a DCO, which was extended until January 31, 2016.

CFTC Issues Second Whistleblower Award

On September 29th, the CFTC announced that it will award approximately $290,000 to a whistleblower for providing information regarding violations of the CEA. This is the second whistleblower award issued by the CFTC’s Whistleblower Program under the Dodd-Frank Act whistleblower provisions, which provides monetary awards for whistleblowers who report violations of the CEA if the information results in an enforcement action resulting in monetary penalties exceeding $1 million. CFTC Press Release.

CFTC Extends Expiration Date of No-Action Relief Granted to Southwest Power Pool, Inc.

On September 29th, the CFTC’s Divisions of Clearing and Risk, Market Oversight, and Swap Dealer and Intermediary Oversight extended the expiration date of the no-action relief granted to Southwest Power Pool, Inc. until December 31, 2015. The CFTC’s no-action letter explains that the Divisions previously agreed that they would not recommend enforcement action against Southwest Power Pool, Inc. for failing to comply with CFTC regulations regarding contracts, agreements, and transactions for the purchase or sale of certain “transmission congestion rights,” “energy transactions,” and “operating reserve transactions” if they are offered pursuant to Federal Energy Regulatory Commission (“FERC”) approved tariffs and other activities related to Southwest Power Pool’s transmission congestion right market.

CFTC Grants Time-Limited No-Action Relief from Requirements to Report OCR Data Electronically

On September 28th, the CFTC’s Division of Market Oversight issued a no-action letter granting conditional, time-limited relief from requirements under the ownership and control (“OCR”) final rule that reporting parties file electronically certain updated reporting forms containing trader identification and market participant data. The no-action letter extends the relief from these filing requirements to dates ranging from April 27, 2016, to February 3, 2017.

CFTC Signs MOU with Korean Regulators to Assist in the Supervision of Cross-Border Clearing Organizations

On September 25th, CFTC Chair Timothy Massad signed a Memorandum of Understanding (“MOU”) with the Korean Financial Services Commission and the Korean Financial Supervisory Service, which provides for cooperation and the exchange of information in the supervision and regulatory oversight of cross-border clearing organizations operating in the U.S. and in the Republic of Korea. CFTC Press Release.

Federal Rules Effective Dates

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Exchanges and Self-Regulatory Organizations

International Swaps and Derivatives Association

ISDA in Review Is Posted

On October 1st, the International Swaps and Derivatives Association (“ISDA”) posted the ISDA in Review, a monthly compendium of links to new documents, research papers, press releases, and comment letters from the Association. ISDA Monthly Update.

OTC Derivatives Compliance Calendar Updated

On September 30th, ISDA updated its global calendar of compliance deadlines and regulatory dates for the OTC derivatives space. ISDA Press Release.

Municipal Securities Rulemaking Board

MSRB Seats New Board and Begins Fiscal Year

On October 1st, the Municipal Securities Rulemaking Board (“MSRB”) announced that it began its new fiscal year on this date and seated the 21-member Board of Directors that establishes regulatory policies and oversees operations. Among the MSRB’s priorities this year are implementation of municipal advisor regulations and a qualification exam, and improvements in transparency for investors of dealer mark-ups and other information related to the pricing of municipal securities. MSRB Press Release.


SEC Provides Notice of Filing of Proposed Rule Change and Amendment to Address Order Handling Obligations on the Part of its Floor Brokers

On October 1st, the SEC published a notice to solicit comments from interested persons on NYSE MKT LLC’s proposed rule change to amend several rules to address certain order handling obligations on the part of its floor brokers. Submissions should be submitted on or before 21 days from publication in the Federal Register. SEC Release No. 34-76064.

Judicial Developments

Securities Laws Provide Exclusive Avenue for Judicial Review

On September 29th, the U.S. Court of Appeals for the D.C. Circuit upheld a district court’s dismissal of a challenge to the SEC’s securities fraud enforcement proceeding against an unregistered investment adviser and its manager. The SEC brought securities fraud charges against plaintiffs in an administrative proceeding. Plaintiffs challenged the proceeding in district court, claiming the SEC’s initiation and conduct of the administrative proceedings violated several of their constitutional rights. The district court dismissed for lack of subject matter jurisdiction on the grounds that securities laws provide a statutory scheme for the administrative proceeding and judicial review that precludes district court jurisdiction. The appellate court affirmed, holding that Congress intended exclusivity when it established the statutory scheme for administrative proceedings and judicial review under securities laws, which precludes the district court from ruling on plaintiffs’ constitutional challenges. George Jarkesy, Jr. v. SEC.

Industry News

House Financial Services Committee Seeks to Rein in DOL Fiduciary Proposed Rule

On September 30th, Think Advisor reported that the U.S. House of Representatives Financial Services Committee passed a bill that would prevent the Department of Labor (“DOL”) from finalizing its proposed fiduciary rule until after the SEC has the opportunity to move forward with its own fiduciary rule. Fiduciary Rule. On September 28th, Reuters reported that former SEC Chair Arthur Levitt reiterated his criticism of attempts to curtail the DOL’s fiduciary rulemaking, arguing that while the SEC should take the lead in proposing changes to fiduciary regulations, political arguments have prevented the agency from taking action. Levitt Criticism.

SEC Extends Contract with Software Provider in Violation Detection Program

On September 30th, Reuters reported that the SEC extended its contract with Palantir Technologies, a private company that provides the agency with software that permits its staff to detect securities violations such as insider trading and Ponzi schemes by searching large volumes of data. The contract expands the SEC’s pilot program with Palantir by awarding the company a five-year, $90 million deal. Software Contract.

Lawsuit Illustrates Potential Danger of Forced Sale of Illiquid Assets

On September 29th, DealBook recounted the circumstances surrounding a lawsuit against hedge fund manager Boaz Weinstein brought by the Public Sector Pension Investment Board of Canada over the valuation of fund assets. The pension fund demanded immediate payment after liquidating its investment in Weinstein’s hedge fund. Weinstein sold the fund’s illiquid assets at far less than their original valuations, and the pension fund sued, claiming Weinstein manipulated the value of corporate bonds held by the fund to artificially lower the amount paid to the pension fund. The article suggests that the lawsuit serves as an example of the potential of liquidity panic to spark another financial crisis. Liquidity Woes.

Alternative Mutual Funds Pose Greater Liquidity Risks

On September 29th, Bloomberg discussed the potential problems posed by alternative mutual funds during times of market stress. The article discussed the analysis of alternative mutual funds as part of the SEC’s Division of Economic and Risk Analysis staff paper released concurrently with proposed rules regarding liquidity risk management for mutual funds. The SEC’s study found that strategies used by alternative mutual funds, including leverage and short selling in ways that mimic hedge funds, create less predictability in terms of their outflows due in part to greater variations in the size of investor redemptions. Alternative Fund Risks.

Proposed Changes to SEC Enforcement Proceedings Do Little to Pacify Critics

On September 28th, Peter J. Henning, writing for DealBook, analyzed the SEC’s recently proposed changes to its administrative enforcement proceedings. Henning questioned the effectiveness of the proposal in addressing recent criticism of administrative proceedings, noting that the proposal’s plan to allow depositions by the defense but limiting the number to three in single-defendant proceedings does little to expand discovery opportunities for defendants. Henning also noted that other changes, including allowing the use of hearsay evidence, may draw even more criticism. Administrative Proceedings.

Banks under Investigation for Price-Fixing in Precious Metals

On September 28th, Bloomberg reported the Switzerland’s Competition Commission identified seven banks that are under investigation for possible collusion to manipulate prices in precious metal trading. The regulator disclosed its investigation in August, which is focused specifically on anti-competitive activing in spot trading.Precious Metals Investigation.

Clawback Rules Seldom Enforced

On September 28th, MarketWatch discussed the lack of enforcement of current federal “clawback” regulations, which require executives of companies must restate financial results to return bonuses and other compensation. The article noted that since the rules were adopted in 2002 as part of the Sarbanes-Oxley Act, very few of the 12,000 financial restatements filed have been accompanied by attempts to enforce clawback regulations by companies or the SEC, even when 4,600 of those were considered so serious that companies considered the previously reported financial statements to be unreliable. The article suggests that proposed rules to expand clawback requirements under the Dodd-Frank Act may result in fewer clawbacks, as stakeholders put up more active resistance. Clawback Rules.

NASAA Introduces Model Disclosure to Simplify Brokerage Fee Information

On September 27th, Reuters reported that the North American Securities Administrators Association (“NASAA”) has created a model fee disclosure for firms to use to assist investors in identifying and understanding the types and amounts of brokerage fees they are charged by firms to maintain and service their accounts. The regulators designed the standardized fee disclosure after studying disclosures from thousands of companies and concluding that the presentation of fee information was difficult for investors to locate and understand. Model Fee Disclosure.