Insights from Winston & Strawn

From time to time, financial institutions that file suspicious activity reports (SARs) with the Financial Crimes Enforcement Network (FinCEN) in the U. S. Department of Treasury have been heard to question the utility of such filings. However, last Wednesday, FinCEN issued the second edition of its SAR Stats Technical Bulletin which should put any such grumbling to rest.

The Bulletin reports that, in 2014, more than 380 law enforcement agencies accessed FinCEN’s SAR database more than 2.3 million times. More than 205,000 SARs were reviewed just by 195 members of 94 special SAR review teams. However, slightly more than 1.7 million SARs were filed in 2014.

One interesting finding in the Bulletin is that rewards-based crowdfunding sites have been used for money laundering. An example would be individuals using stolen credit card information to fund online money transmitter accounts, which then were used to fund crowdfunding campaigns. The Bulletin also mentions the use of crowdfunding by a campaign creator in a high risk country, advocating violence and possibly funding terrorist activity. Obviously, the filing of SARs in these cases greatly assists investigators.

By a factor of almost five-to-one, the most prevalent suspicious activity reported by depository institutions was fraudulent use of a social security number. At the top of the list of suspected fraudulent activities reported by money service businesses were what FinCEN calls “Person in Need Scams” and “Romance Scams,” but the greatest number of MSB SARs by far related to transactions with persons in high risk countries, presumably money transmittal to persons in such countries. In the case of securities and futures firms, by far the greatest number of SARs related to penny stocks. The greatest number of suspicious activities reported by insurance companies related to structuring, particularly money orders bought in different locations or on different days, but submitted together, presumably to pay large insurance premiums.

While one might reasonably argue whether the benefits of SAR filings justifies the costs, the recent FinCEN Bulletin certainly does suggest that SARs are being actively used by law enforcement.

Feature: U.K. Financial Conduct Authority’s New Rules to Encourage More Financial Whistleblowing

On October 6, 2015, the U.K. Financial Conduct Authority (“FCA”), together with the Bank of England’s Prudential Regulation Authority (“PRA”), announced the publication of its new rules on employee whistleblowing. The new rules are designed to shape and reinforce best practices that currently exist in the financial services industry. In this announcement, Tracey McDermott, acting chief executive of the FCA, commented that “Whistleblowers play an important role in exposing poor practice in firms and they have in the past few years contributed intelligence crucial to action taken against firms and individuals … It is in the interests of the industry and regulators alike that wrongdoing is identified and addressed promptly.”

In conjunction with the new rules, the PRA issued the following related publications:

  • Policy statement: “Whistleblowing in deposit-takers, PRA-designated investment firms and insurers.”PS24/15
  • Supervisory statement: “Whistleblowing in deposit-takers, PRA-designated investment firms and insurers.” SS39/15
  • Consultation paper: “Strengthening accountability in banking and insurance: regulatory references.”CP36/15

The FCA’s announcement of the new rules follows its July 2015 release of final rules on improving individual accountability in the U.K.’s banking sector. Those rules presented a series of actions designed to hold employees at all levels in banking to appropriate standards of conduct.

According to, the idea for the new rules was sparked in the wake of the banking scandals of 2012 (which included the rigging of Libor and foreign-exchange benchmarks) in an effort to empower individuals to raise concerns about bad behavior in banks and insurance firms. In 2013, the Parliamentary Commission on Banking Standards (“PCBS”) suggested that these types of scandals might have been uncovered sooner if employees had been prepared to sound the alarm. The PCBS, therefore, recommended that banks put mechanisms in place in order to allow their employees to raise concerns internally. The PCBS also recommended that banks appoint a senior manager to oversee the adequacy of whistleblowing procedures.

Whistleblowers Before and After the Financial Crisis

The Bank of England has questioned why whistleblowers did not play a large or effective part in the foreign exchange scandal, determining that people are far less willing to blow the whistle in financial markets than they are in the rest of the economy. The FCA, however, countered that in the years since the financial crisis there has been a sharp uptick in whistleblowing, as well as investigations launched off the back of information volunteered by employees, even without any payment in return for the information. The numbers seem to agree: In the 2014-2015 financial year, there were 1,340 whistleblowing disclosures recorded against 1,040 in the preceding year. In sharp contrast, in the years before the financial crisis, the then Financial Services Authority received only 138 such disclosures.

Application of the New Rules

The new rules, which take effect in September 2016, apply to three types of firms (but will also represent best-practice guidance for smaller companies):

  • Large banks, building societies and insurance firms (UK deposit-takers with assets of £250 million or greater);
  • PRA-designated investment firms; and
  • insurance and reinsurance firms within the scope of the European Union’s Solvency II directive and to the Society of Lloyd’s and managing agents.

According to The Telegraph, the FCA is currently consulting on whether to also apply the rules to UK branches of overseas banks, which could be subject to contradictory rules in other countries.

In order to follow the new rules, large financial firms will be required to:

  • appoint a senior manager as their “whistleblowers’ champion”;
  • put in place internal whistleblowing arrangements able to handle disclosures from all employees;
  • tell employees via settlement agreements that they have a legal right to blow the whistle; and
  • present a report on whistleblowing to the board, at least every year.

Whistleblowers in the UK Will Not Be Compensated

It’s one thing for employees to feel comfortable enough to blow the whistle on their companies, but it’s another thing for these same employees to think that they will be compensated for coming forward. The Financial Times noted that the FCA has actually stopped short of rules that would see whistleblowers paid for their information, as they are in the U.S. where the Financial Times suggested that the Securities and Exchange Commission (“SEC”) operates a veritable “bounty” system for useful information. A whistleblower in the U.S. can receive a portion of any fine charged, as occurred in 2013 when a whistleblower received $12 million in an investor fraud action (Forbes has suggested that a strong ethical argument can be made for keeping money out of the equation for greater clarity of purpose).

Banking Agency Developments

OCC Publishes Final Rule Establishing a New Regulatory Capital Rule

On October 13th, the Office of the Comptroller of the Currency (“OCC”) announced that it has published a final rule that established a new regulatory capital rule. The rule strengthens the definition of regulatory capital, increases risk-based capital requirements, and amends the methodologies for determining risk-weighted assets. The rule became effective in January 2015 for all national banks and federal savings associations. Now that the regulatory capital rule is final, the OCC is rescinding certain OCC bulletins and three Office of Thrift Supervision (“OTS”) issuances that have become outdated or superseded. OCC Bulletin.

Treasury Department Developments

FinCEN Director Speaks at Predictive Analytics World for Government Conference

On October 13th, Jennifer Shasky Calvery, Director of the Financial Crimes Enforcement Network (“FinCEN”), spoke at the Predictive Analytics World for Government conference in Washington, D.C. Ms. Calvery provided insight into how FinCEN is working to harness advanced analytics in order to address threats to our financial system. Calvery Speech.

Securities and Exchange Commission

Statements and Speeches

White Emphasizes SEC’s Focus on Risk in Regulating Private Funds after Dodd-Frank

On October 16th, SEC Chair Mary Jo White discussed the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) on the SEC’s understanding of the risk profiles of private funds and how it informs the agency’s approach to private fund regulation. White highlighted the importance of mandatory registration and disclosure under the Dodd-Frank Act in providing the SEC with important tools to monitor industry trends and to identify the kinds of risks associated with private funds, both firm-specific risks and risks to the broader financial system. White noted that the SEC is taking measures to assist funds in addressing specific kinds of operational risks, including those associated with transitioning client accounts, cybersecurity, and market stress. White also highlighted how financial regulators’ focus on systemic risk indirectly but profoundly impacts the operation of private funds, pointing to the Volcker Rule as an example. White Remarks.

SEC Continues to Examine Role of ETPs in August 24th Market Volatility

On October 15th, SEC Chair Mary Jo White, in her opening remarks at the Investor Advisory Committee meeting, discussed the SEC’s ongoing analysis of exchange-traded products (“ETPs”) and their relation to the market volatility experienced on August 24, 2015. White indicated that the Commission is scrutinizing the operation of the limit-up limit-down mechanism, which triggered trading pauses in many ETPs during the volatility event on August 24, to see if any adjustments need to be made before approving its use on a permanent basis. White also stated that the Commission is reviewing comments it has received regarding pricing issues in the listing and trading of ETPs to understand why the events of August 24 resulted in many ETPs trading at steep discounts to their net asset values (“NAVs”). White Remarks.

Aguilar Encourages Investor Advisory Committee to Scrutinize ETFs

On October 15th, in a statement to the Investor Advisory Committee, SEC Commissioner Luis A. Aguilar advised the committee regarding the questions he hopes it will explore as part of its examination of exchange-traded funds (“ETFs”). Aguilar encouraged the committee to consider, among other things, whether trading in ETFs should be halted if a large number of the underlying trading assets are subject to a trading halt, whether limit-up limit-down rules should be revised, whether incentives for liquidity providers for ETFs would be beneficial during periods of extreme market stress, and whether alternative pricing methods for less-liquid ETFs should be considered. Aguilar Remarks

Aguilar Highlights the Importance of Corporate Governance in Address to Directors

On October 14th, Commissioner Aguilar delivered remarks to the 12th Annual Boardroom Summit and Peer Exchange in New York. In his speech, Aguilar addressed the important contributions made by boards of directors in implementing strong corporate governance and outlined three crucial areas of corporate governance: effective engagement with shareholders, crisis and risk management as an element of company resiliency, and the maintenance of board relevancy during changing times. Specifically, Aguilar emphasized the need for boards to maintain effective risk oversight in the face of rising cybersecurity threats to companies, noting the increased pressure brought by shareholder and regulatory actions against boards for failing to guard against cyberattacks. Aguilar assured directors that the SEC would not target the business decisions of corporate boards in enforcement actions as long as boards are making a good faith effort to fulfill their duties conscientiously. Aguilar Remarks.

SEC Chief of Staff Outlines SEC Priorities in Promoting Compliance

On October 14th, Andrew J. Donohue, SEC Chief of Staff, addressed the NRS 30th Annual Fall Investment Adviser and Broker-Dealer Compliance Conference. Donohue reviewed the SEC’s approach to promoting compliance and conducting compliance examinations, with an eye to assisting compliance professionals in addressing potential risk areas within their own organizations. Donohue reiterated the position stated by SEC Chair Mary Jo White and Division of Enforcement Director Andrew Ceresney that the SEC has not targeted compliance professionals in enforcement actions, and will only pursue actions against those compliance professionals who clearly cross the line through egregious actions or inaction. Donahue Remarks.

Other Developments

SEC Makes Private Fund Statistics Publicly Available

On October 16th, the SEC announced that its Division of Investment Management’s Risk and Examinations Office published a report of private fund statistics from the fourth quarter of 2014. The report is based on aggregated data submitted by private fund advisers through Form ADV and Form PF. SEC Press Release.

SEC Will Vacate Municipal Advisor and NRSRO Bars Affected by D.C. Circuit’s Koch Decision

On October 9th, the SEC issued a statement in response to the decision by the U.S. Court of Appeals for the D.C. Circuit in Koch v. SEC, in which the court vacated certain associational bars imposed by the SEC because the bars were impermissibly retroactive.  The SEC barred Donald L. Koch from association with municipal advisors and nationally recognized statistical rating organizations (“NRSROs”) for misconduct that occurred prior to July 22, 2010, the effective date of the Dodd-Frank Act, which granted the SEC the authority to impose those associational bars. The SEC stated that an individual who has been barred from association with a municipal advisor and/or NRSRO and who believes that bar may be affected by the D.C. Circuit’s decision in Koch may request an order from the Commission vacating that bar via a new form issued concurrently with the SEC’s statement.  SEC Statement.

Commodity Futures Trading Commission

CFTC Extends Conditional Time-Limited No-Action Relief to Australian-Based Trading Platform Yieldbroker Pty Limited

On October 15th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced that its Division of Market Oversight (“DMO”) has issued a no-action letter (Letter 15-56) extending conditional time-limited relief for Australian-based trading platform Yieldbroker Pty Limited. Letter 15-56 will allow Yieldbroker additional time within which to comply with the terms of CFTC No-Action Letter No. 15-29, which is an enabling no-action letter for qualifying swaps trading platforms that are licensed in Australia and overseen by the Australian Securities & Investments Commission (“ASIC”). CFTC Press Release.

CFTC’s Market Risk Advisory Committee to Meet on November 2, 2015

On October 15th, the CFTC announced that its Market Risk Advisory Committee (“MRAC”) will hold a public meeting on November 2, 2015 at CFTC’s headquarters in Washington, D.C. The MRAC will be presented with and discuss the CCP Risk Management Subcommittee’s recommendations to the MRAC regarding how the CCP default plans that were presented at the April 2, 2015 MRAC meeting can better reflect market conditions in the case of the default of a significant clearing member. The meeting is open to the public with seating on a first-come, first-served basis. CFTC Press Release.

CFTC Further Implements Trade Execution Requirement

On October 14th, the U.S. Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight (“DMO”) announced further extension of time-limited no-action relief for swaps executed as part of a package transaction in the categories that currently receive relief under CFTC Letter 14-137. This extension of time-limited relief will enable the DMO to continue to further assess the appropriate response for applying the trade execution requirement to swaps in certain types of package transactions.

Federal Rules Effective Dates

October 2015 - December 2015

Commodity Futures Trading Commission

November 13, 2015 Membership in a Registered Futures Association. 80 FR 55022.

October 2, 2015. Repeal of the Exempt Commercial Market and Exempt Board of Trade Exemptions. 80 FR 59575.

Consumer Financial Protection Bureau

October 3, 2015 2013 Integrated Mortgage Disclosures Rule Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) and Amendments; Delay of Effective Date. 80 FR 43911.

Federal Deposit Insurance Corporation

October 16, 2015 Nondiscrimination on the Basis of Disability Minority and Women Outreach Program Contracting. 80 FR 62443.

October 1, 2015 Loans in Areas Having Special Flood Hazards. 80 FR 43215Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409.

Federal Housing Finance Agency

October 5, 2015 2015-2017 Enterprise Housing Goals. 80 FR 53391.

Federal Reserve System

December 1, 2015 Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies. 80 FR 49081.

October 1, 2015 Loans in Areas Having Special Flood Hazards. 80 FR 43215Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409.

National Credit Union Administration

November 23, 2015 Promulgation of NCUA Rules and Regulations. 80 FR 57512.

October 23, 2015 Corporate Credit Unions. 80 FR 57283.

October 2, 2015 Federal Credit Union Ownership of Fixed Assets. 80 FR 45844.

October 1, 2015 Loans in Areas Having Special Flood Hazards. 80 FR 43215.

Office of the Comptroller of the Currency

October 1, 2015 Loans in Areas Having Special Flood Hazards. 80 FR 43215 Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409.

Securities and Exchange Commission

October 26, 2015 Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule. 80 FR 58123.

October 19, 2015 Pay Ratio Disclosure. 80 FR 50103.

October 13, 2015 Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants. 80 FR 48963.

October 2, 2015 Adoption of Updated EDGAR Filer Manual. 80 FR 59578.

Exchanges and Self-Regulatory Organizations

Financial Industry Regulatory Authority

FINRA Proposes Rule Changes to Protect Seniors and Other Vulnerable Adults from Financial Exploitation

On October 15th, the Financial Industry Regulatory Authority (“FINRA”) requested comment on proposed amendments to its rules to address the financial exploitation of seniors and other vulnerable adults. The proposal would amend FINRA Rule 4512 (Customer Account Information) to require firms to take steps to obtain the contact information for a trusted person for a customer’s account and would adopt new FINRA Rule 2165 (Financial Exploitation of Specified Adults) to allow firms to place temporary holds on accounts of certain customers in cases where they reasonably suspect financial exploitation of these customers. Comments should be submitted on or before November 30, 2015. FINRA Regulatory Notice 15-37.

SEC Requests Comment on Proposed Changes to FINRA’s Margin Requirements Rule

On October 14th, the SEC gave notice of a proposed rule change by FINRA that would amend FINRA Rule 4210 (Margin Requirements) to establish margin requirements for the market for To Be Announced (“TBA”) transactions. The proposed rule changes would apply to the following transactions: TBA transactions, inclusive of adjustable mortgage rate transactions; Specified Pool Transactions; and Collateralized Mortgage Obligation transactions conforming to the requirements of a Government-Sponsored Enterprise or agency program. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 19, 2015. SEC Release No. 34-76148.

FINRA Seeks Comment on Revisions to Proposal Requiring Pricing Disclosure In Fixed Income Securities Transactions

On October 12th, FINRA requested comment on a revised proposal that would require additional disclosures of customer confirmations for transactions involving corporate and agency debt securities. Changes to the proposed rule include replacing the size-based disclosure threshold with a retail customer standard; allowing firms to use alternate methods for calculating the reference price for more complex trade situations; requiring confirmations to include a link to TRACE; and adding other exceptions from the requirements. Comments should be submitted on or before December 11, 2015. FINRA Regulatory Notice 15-36.

ICE Clear Credit LLC

ICC Proposes Changes to Rules Related to Missed Submissions Process

On October 9th, the SEC requested comment on a proposed rule change by ICE Clear Credit LLC (“ICC”), which would revise ICC Rules governing the rule submission process for missed submissions of end-of-day prices for specific instruments. Among other things, the proposed changes would replace the current once-in-a-lifetime waiver with a conditional once-a-year waiver for missed submissions caused by technical failures. Comments should be submitted on or before November 6, 2015. SEC Release No. 34-76122.

ICC Gains Approval to Clear Additional SWES Credit Default Swap Contracts

On October 8th, the SEC issued an order approving ICC’s proposed rule change allowing ICC to clear additional Standard Western European Sovereign (“SWES”) credit default swap contracts. The proposal modifies ICC Rules to include the Federal Republic of Germany, the French Republic, and the United Kingdom of Great Britain and Northern Ireland to the list of specific Eligible SWES Reference Entities to be cleared by ICC. SEC Release No. 34-76111.

ICE Clear Europe Limited

SEC Approves Changes to ICE Clear Europe’s CDS Risk Policies

On October 13th, the SEC approved a rule change proposed by ICE Clear Europe Limited (“ICE Clear Europe”) to modify its credit default swap (“CDS”) risk policies to improve its existing CDS risk model. Among other things, the amendments will modify the credit spread response and portfolio response components of the risk model; modify the CDS Guaranty Fund allocation methodology and index liquidity and concentration charges; revise the procedures for intraday margin calls; and create a new framework for recovery rate sensitivity requirement parameters. SEC Release No. 34-76136.


SEC Approves NASDAQ’s Proposed Kill Switch

On October 9th, the SEC approved The NASDAQ Stock Market LLC’s (“NASDAQ”) proposed rule change to adopt a kill switch that would allow all participants of the NASDAQ Options Market (“NOM”) to remove quotes, cancel open orders, and prevent the submission of new quotes and orders until NOM reactivates the participant’s access.  SEC Release No. 34-76123.

National Securities Clearing Corporation

NSCC Proposes Changes to Settlement Process for Fixed Income Securities

On October 8th, the National Securities Clearing Corporation (“NSCC”) filed a proposed rule change with the SEC that would allow trades in fixed income securities that are scheduled to settle on the day after the trade (“T+1”) to settle, when eligible, through its Continuous Net Settlement system or through its Balance Order Accounting Operation on a trade-for-trade basis. Comments should be submitted on or before November 5, 2015. SEC Release No. 34-76112.

NSCC Authorized to Implement Changes to Margining Methodology Involving Family-Issued Securities

On October 5th, the SEC gave notice that it did not object to NSCC’s advance notice to revise its margin charge by excluding from its volatility margining model a member’s positions in in family-issued securities, or securities issued by the member or its affiliates, when the member is on the NSCC’s Watch List. The change seeks to address NSCC’s exposure to “wrong-way” risks in serving as a central counterparty to members with positions in family-issued securities. SEC Release No. 34-76075.


NYSE Issues Cybersecurity Guide for Public Companies

On October 14th, MarketWatch reported that the New York Stock Exchange LLC (“NYSE”) has published a cybersecurity guide for public companies in collaboration with cybersecurity company Palo Alto Networks. Among other things, the book offers directors and officers of public companies guidance regarding their obligations, their policies and procedures for action plans and incident response, and their duty to protect trade secrets and consumer interests. Cybersecurity Guidance.

NYSE Issues Updated Policies Governing Trading Floor Conduct

On October 14th, the NYSE published an information memo containing updated policies regarding conduct on all NYSE premises, including the trading floor. The policies discussed in the memo include floor conduct and safety guidelines; gambling policy; the prohibition against firearms, illegal weapons, and fireworks; and non-harassment policy. NYSE Information Memo 15-5.

NYSE Gains SEC Approval of Plan to Revise Its Complimentary Products and Services for Listed Companies.

On October 9th, the SEC issued an order approving the NYSE’s proposed rule change amending its listed company manual to revise the suite of complimentary products and services offered to current and newly listed companies, update the value of these complimentary products and services, and expand the complimentary products and services offered to companies that transfer their listing to the NYSE from another national securities exchange. SEC Release No. 34-76127.

Industry News

Leading Global Investment Management Firm to Close Down Flagship Hedge Fund

On October 12th, DealBook reported that a leading global investment management firm plans to close down its $1.6 billion flagship hedge fund following heavy losses and investor withdrawals. This follows last week’s news that private equity giant Bain Capital was liquidating its multibillion-dollar Absolute Return Capital hedge fund. Hedge Fund.

SEC Decreases its Use of In-House Judges

On October 11th, The Wall Street Journal reported that the SEC has quietly pulled back on its use of in-house judges, a practice that brought it criticism and legal challenges. According to a Journal analysis, the SEC is now sending fewer serious contested cases to its own judges – in the three months through September 2015, the SEC sent just four of 36 (or 11 percent) of its contested cases to its administrative law judges. That was down from 40 percent in the same period of 2014. The pullback allegedly came after a recent meeting in which Andrew Ceresney, SEC director of enforcement, told his senior staff it should send contested cases alleging insider trading or accounting fraud to federal court unless there were good reasons to use the SEC judges. In-House Judges.