Insights from Winston & Strawn

At a speech to the Managed Funds Association’s Outlook 2015 conference on October 16th, Chairman Mary Jo White focused on the increased transparency and investor protection as a result of the registration and reporting requirements for private fund advisers under the Dodd­Frank Wall Street Reform and Consumer Protection Act. Reflecting on the five years since implementation, Chair White noted that the SEC has seen approximately 1,500 new private fund registrants, which, in conjunction with increased reporting requirements, has given the SEC greater insight into the private fund industry to help it understand firm­specific and systematic risks. Chair White stressed the importance of the data collection in helping the staff monitor investment strategies employed by private funds and to understand the potential effects of certain market and global events. The speech followed the release of the SEC’s first “Private Fund Statistics” report which reflects aggregated data reported by private fund advisers on Form ADV and Form PF. The SEC intends to update the report periodically and sees it as a tool for both the SEC and investors.

The speech also discussed systematic and firm­specific risks that private fund advisers should be addressing. In looking at risks that affect the broader asset management industry Chair White noted three operational risks meriting close attention – risks surrounding the transition of client accounts, cybersecurity, and market stress. From a firm­specific standpoint, Chair White stressed the fiduciary duty owed to clients and the importance of avoiding (or at least disclosing) conflicts of interest. Once again, improper shifting of expenses away from the adviser and undisclosed accelerated monitoring fees were highlighted as uncovered deficiencies. Private fund advisers should consider the foregoing when reviewing their policies and practices.

The Present and Future Challenges Facing Corporate Governance

In a wide­ranging speech last week before the 12th Annual Boardroom Summit and Peer Exchange in New York, Securities and Exchange Commission (“SEC”) Commissioner Luis A. Aguilar brought to the forefront the challenges faced by boards of directors in implementing and maintaining effective corporate governance. Aguilar discussed the pressures placed upon boards by the responsibility to implement strong corporate governance programs, the fiduciary duty to protect shareholders’ interests, and the potential threat of shareholder lawsuits. Aguilar sought to reassure corporate boards that the SEC will not target directors in enforcement actions for missteps in judgment and set out the three themes of corporate governance that he believes are especially vital: effective engagement with shareholders, company resiliency, and board relevancy. In the case of board relevancy, Aguilar discussed the need for boards to innovate in a business environment characterized by rapid “technological and economic transformation.” Aguilar also noted a growing belief by experts that “boards [need] to bring fresh viewpoints to the table, and … be willing to challenge the status quo in the pursuit of constructive change.” Aguilar outlined the arguments of those who favor imposing term limits for directors as a way to meet this goal, remarking that the research regarding the impact of board tenure on company performance is inconclusive and suggesting that a periodic review of board effectiveness may be a better way to address the need for relevant boards in changing times.

Erik Vermeulen, Professor of Business and Financial Law at Tilburg Law School, sees a potential model for innovative corporate governance in the organizational structure of startup companies. In a recent blog post for  the CLS Blue Sky Blog, Vermeulen argues that established corporations can learn a great deal from the way in which innovative startup companies structure their business operations because these companies grasp the importance of digital technologies that define the modern business environment. Vermeulen notes that many companies lose their innovative spirit in a regulatory climate that creates a hierarchical relationship between its managers, directors and investors. Those companies that are able to implement an innovation­oriented model in their corporate governance practices, Vermeulen asserts, are in the best position to handle future challenges. Vermeulen points to companies led by charismatic CEOs who view themselves as part of a corporate partnership and who encourage collaboration, horizontal hierarchies, and open communication as providing a model for the future of corporate governance.

Another way in which boards have the potential to bring “fresh viewpoints to the table” is in the area of board diversity. A recent article in Bloomberg demonstrates that the perception of the importance of board diversity splits along gender lines, citing a survey by PriceWaterhouseCoopers which found that 63 percent of female board members felt gender diversity on corporate boards was “very important,” while only 35 percent of male board members said the same. In a recent blog post for the Harvard Law School Forum on Corporate Governance and Financial Regulation, Aaron A. Dhir, an Associate Professor of Law at Osgoode Hall Law School in Toronto, points out that the advocates and detractors of corporate quotas to increase gender diversity of boards argue that the practice will impact the effectiveness and dynamics of corporate boards either positively or negatively, but there is little practical evidence to support their speculations. Dhir initiated a study to address this lack of evidence by exploring the effect of corporate quotas on corporate governance through interviews with Norwegian corporate directors to learn how board members working under the first corporate quota law view the effects of corporate quotas on board functioning. Dhir’s study found that after an adjustment period, most of the men and women interviewed felt that “quota­induced gender diversity has positively affected boardroom work and firm governance” but the experience raised questions about whether a quota system is the best way to achieve board diversity.

If corporate governance needs to change to meet the challenges of the future, what challenges does it face presently? C. Edward Fee, Charles J. Hadlock, Jing Huang and Joshua R. Pierce recently set out to discover if the decision­making process by boards when removing a CEO is evidence of a corporate governance failure in blog post on The CLS Blue Sky Blog. The authors examine evidence that the decision to remove a CEO is influenced by industry performance and other factors that have little to do with the CEO’s abilities, suggesting that CEO retention and dismissal is largely based on luck and is evidence of poor decision­making on the part of boards. Using data from CEO turnovers at U.S. publicly­listed companies from 1990 to the present, the authors found that there was no evidence to support the claim that industry performance alone accounted for CEO turnover and modeling choices by researchers often account for this perception, including an over­reliance on press characterization of CEO dismissals that are potentially biased. The authors conclude that a corporate governance failure by boards in CEO removal is not supported by the data.

The assumption dispelled by Fee, Hadlock, Huang and Pierce that the reasons for CEO removal signal a corporate governance failure by boards illustrates that no matter how boards shape corporate governance in the future, their decisions will continue to be subject to intense scrutiny.

Banking Agency Developments

OCC to Host Tennessee Workshops on Risk Governance and Credit Risk

On October 23rd, the Office of the Comptroller of the Currency (the “OCC”) announced that it will be hosting two workshops in Knoxville, Tenn., at the Hilton Knoxville, December 1­2, for directors of national community banks and federal savings associations. The Risk Governance workshop on December 1 will combine lectures, discussion, and exercises to provide practical information for directors to effectively measure and manage risks. It will also focus on the OCC’s approach to risk­based supervision and major risks in the financial industry. The Credit Risk workshop on Dec. 2 will focus on credit risk within the loan portfolio, such as identifying trends and recognizing problems. It will also cover the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change. Tennessee Workshops.

OCC’s Comptroller of the Currency Approves Final Swaps Margin Rule

On October 22nd, OCC Comptroller of the Currency Thomas J. Curry signed the final rule implementing margin requirements for non­cleared swap transactions in accord with the Dodd­Frank Wall Street Reform and Consumer Protection Act. OCC News Release 2015-­142. This action is a joint final rule with the Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Board, the Farm Credit Administration, and the Federal Housing Finance Agency and will apply to entities supervised by these agencies that register with the Commodity Futures Trading Commission (“CFTC”) or the SEC as a dealer or major participant in swaps. FDIC Press Release 81­-2015. FDIC Chairman Martin J. Gruenberg said, “[e]stablishing margin requirements for non­ cleared swaps is one of the most important reforms of the Dodd­Frank Act … These margining practices will promote financial stability by reducing systemic leverage in the swaps marketplace, and promote the safety and soundness of banks by discouraging the excessive growth of risky non­cleared swap positions.” FDIC Vice Chairman Thomas Hoenig said, “[w]hile the system overall would have been best served if banks posted as well as collected margin with their affiliates, much is accomplished with the requirement that the insured bank collect margin … I also recognize that other agencies with jurisdiction over non­bank affiliates could require these firms to collect margin as they finalize their rules on this matter.” See also Deal Book Article.

FDIC Board Adopts Proposed Rule to Increase DIF to Statutorily Required Level

On October 22nd, the FDIC Board of Directors adopted a proposal to increase the Deposit Insurance Fund (“DIF”) to the statutorily required minimum level of 1.35 percent. The proposed rule would impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The FDIC expects the reserve ratio would likely reach 1.35 percent after approximately two years of payments of the proposed surcharges. The primary purposes of the DIF are to protect the depositors of insured banks and to resolve failed banks. The DIF is funded mainly through quarterly assessments on insured banks. Comptroller Curry also voted for the rule in his capacity as a director of the FDIC, and discussed the rule at the FDIC board meeting. OCC News Release 2015­-143. Comments will be due 60 days after the rule is published in the Federal Register, which is expected shortly. FDIC Press Release 82­-2015.

Comptroller of the Currency Discusses Credit Risk

On October 21st, Comptroller Curry, during a speech before the Exchequer Club, discussed increasing credit risk in the federal banking system. OCC Speech.

Comptroller of the Currency Discusses Regulatory Burden Relief

On October 19th, Comptroller Curry discussed regulatory burden relief at an outreach meeting conducted under the Economic Growth and Regulatory Paperwork Reduction Act. OCC Speech.

Treasury Department Developments

Treasury Department’s Deputy Assistant Secretary Gives Speech on Market Structure at Risk USA Conference

On October 21st, the U.S. Department of the Treasury’s Deputy Assistant Secretary, Patrick Pinschmidt, spoke at a Risk USA Conference about market structure and its potential impacts on financial stability. After giving an overview of some of the secular and cyclical factors that are affecting the way our markets are functioning, he discussed how an array of changes since the crisis should help bolster the resilience of the overall financial system and then outlined the steps that Treasury and the Financial Stability Oversight Council (“FSOC”) are taking to address these issues. Treasury Press Release.

Joint Statement Released on Obama Administration’s Legislative Proposal to Address Puerto Rico’s Urgent Fiscal Situation

On October 21st, U.S. Treasury Secretary Jacob J. Lew, National Economic Council Director Jeff Zients, and Health and Human Services Secretary Sylvia Mathews Burwell released a statement after the Obama Administration unveiled a detailed legislative outline to help Puerto Rico address its serious fiscal challenges. Treasury Press Release.

Securities and Exchange Commission


Division of Corporation Finance Clarifies Its Approach to No­Action Requests Relating to the Exclusion of Shareholder Proposals

On October 22nd, the SEC Division of Corporation Finance issued a staff legal bulletin offering guidance regarding the scope and application of certain Securities Exchange Act Rules governing the exclusion of shareholder proposals. The bulletin states that the Division will alter its approach to no­action requests under Exchange Act Rule 14a­8(i)(9) going forward, focusing more on whether there is a direct conflict between a shareholder proposal and a management proposal, and will not consider a shareholder proposal to be in conflict with a management proposal if a reasonable shareholder could logically vote for both proposals. The bulletin also addressed concerns raised by the U.S. Court of Appeals for the Third Circuit’s decision in Trinity Wall Street  v. Wal­MartStores,Inc. and its implications for interpreting Exchange Act Rule 14a­8(i)(7). The Third Circuit applied a two­part test to determine whether a shareholder proposal qualified for a significant policy exemption

to the ordinary business exclusion, concluding that the significant policy issue must be divorced from day­to­day business matters. The bulletin stated that the Division, in considering no­action requests, will continue to apply Rule 14a­8(i)(7) in line with its prior application of the significant policy exemption, which indicated that a significant policy issue can transcend a company’s ordinary business operations even if the issue relates to the “‘nitty­gritty of its core business.’” Division of Corporation Finance Staff Legal Bulletin No.14H.

Division of Trading and Markets Updates FAQs regarding Regulation SHO

On October 15th, the SEC’s Division of Trading and Markets published new and updated answers to frequently asked questions regarding Regulation SHO. Updated topics include clearance and settlement, threshold securities, close­out requirements under Rule 204, market making and Rule 144 transactions, and trade execution. New responses include guidance regarding marking equity security orders “long” under Rule 200; obtaining a “locate” on a sale of the underlying security in transactions involving convertible or exchangeable securities; and applying the 35 day calendar close out period to a fail to deliver position resulting from a sale of securities a person is deemed to own under Rule 200. Regulation SHO FAQs.

Speeches and Statement

Director Grim Reports to House Subcommittee on Current and Potential Investment Management Rulemaking Initiatives

On October 23rd, David W. Grim, Director of the SEC’s Division of Investment Management, testified before the U.S. House of Representatives Subcommittee on Capital Markets and Government Sponsored Entities. Grim provided an overview of the Division’s activities and responsibilities, including recent investment management rulemaking initiatives. Grim indicated that the Division is considering recommending that the Commission propose new requirements related to the use of derivatives by investment companies, transition plans for investment advisers, stress testing for large investment advisers and investment companies, and third­party compliance reviews. Grim Remarks.

Mary Jo White Urges Review of Treasury Trading Venue Rules

According to The Wall Street Journal on October 20th, SEC Chair Mary Jo White said in a keynote speech at a Federal Reserve Bank of New York event that the SEC could potentially subject government bond markets and their trading venues to new forms of oversight. Chair White noted that regulators should waste no time building on their understanding and responses to recent disruptive trading in U.S. Treasuries. White Remarks.

Aguilar Discusses Cybersecurity Risks to Small and Midsize Businesses

On October 19th, SEC Commissioner Luis A. Aguilar released an article he wrote for the autumn 2015 edition of the Cyber Security Review. In the article, Aguilar discussed the challenges facing small and midsize business in dealing with cybersecurity threats. Aguilar noted that smaller business are at greater risk of cybersecurity attacks because they lack the resources of larger organizations and they serve as potential gateways for cybercriminals to access larger companies. Aguilar called for a partnership between the public and private sector to assist smaller businesses in addressing their cybersecurity risks. Aguilar Statement.

Investor Advocate Registers Disapproval of NYSE Plan to Allow Early Stage Companies to Bypass Shareholder Approval of Sales to Insiders.

On October 16th, SEC Investor Advocate Rick A. Fleming issued a statement recommending the Commission disapprove a proposal by the New York Stock Exchange (“NYSE”) that would allow certain early stage companies to sell shares to insiders and other related parties without first obtaining shareholder approval. Fleming raised concerns that the proposal would lower corporate governance standards for smaller companies, weakening the rights of existing shareholders and lowering investor confidence. Fleming Statement.

Other Developments

Government­Business Forum on Small Business Capital Formation

The SEC will hold its annual Government­Business Forum on Small Business Capital Formation on November 19, 2015. The forum will feature panel discussions on exempt and registered offerings occurring after the passage of the JOBS Act followed by group breakout sessions in which participants will formulate specific policy recommendations. SEC Press Release.

SEC Publishes List of Rules Subject to Agency Review

On October 22nd, the SEC requested comment on the rules subject to review pursuant to the Regulatory Flexibility Act, which requires the agency to review rules that have a significant economic impact upon a substantial number of small entities within ten years of finalization. Comments should be submitted within 30 days of publication in the Federal Register, which is expected shortly. SEC Commission Notice 33-­9965.

SEC Releases Fiscal Year 2015 Enforcement Results

On October 22nd, the SEC announced the results of its enforcement actions during the 2015 fiscal year. The SEC reported that it filed 807 enforcement actions during fiscal year 2015 and obtained orders for disgorgement and penalties totaling approximately $4.2 billion. The SEC also noted “first­of­their­kind” cases involving, among other things, misallocation of broken deal expenses by a private equity adviser, violations of the Foreign Corrupt Practices Act (“FCPA”) by a financial firm, and pricing­related fraud in the primary market for municipal securities. SEC Press Release.

Staff Announcements.

On October 20th, the SEC announced that it has appointed two new Associate Directors in the Division of Trading and Markets’ Office of Clearance and Settlement. Wenchi Hu will serve as Associate Director, Risk and Supervision, and Christian Sabella will serve as Associate Director, Regulation. SEC Press Release.

Commodity Futures Trading Commission

CFTC’s Massad Said Agency Will Take Address Turbulence in Treasury Futures Trading

On October 21st, reported that the CFTC’s Timothy Massad said that the agency was set to take actions to address turbulence in Treasury futures trading, following concerns about stability in the $12.8 trillion government bond markets underlying those contracts. Speaking at a Federal Reserve Bank of New York conference, Mr. Massad said there were “specific actions we may take in the next few months.” CFTC Actions.

Federal Rules Effective Dates

October 2015 ­ December 2015

Click here to view table.

Exchanges and Self­Regulatory Organizations


SEC Designates Longer Period to Consider Changes to BATS’ and BYX’s Pre­Opening Session Rules

On October 21st, the SEC extended until December 9, 2015, its deadline to approve, disapprove, or institute proceedings to determine whether to disapprove BATS Exchange, Inc.’s (“BATS”) and BATS Y­Exchange, Inc.’s (“BYX”) separately proposed amendments to their respective rules related to the Pre­Opening Session and proposed new rules to allow members to indicate a time upon which their order may become eligible for execution. SEC Release Nos. 34­-76204 and 34­-76206.

Direct Edge

SEC Designates Longer Period to Consider Changes to EDGA’s and EDGX’s Pre­Opening Session Rules

On October 21st, the SEC extended until December 9, 2015, its deadline to approve, disapprove, or institute proceedings to determine whether to disapprove EDGA Exchange, Inc.’s (“EDGA”) and EDGX Exchange, Inc.’s (“EDGX”) separately proposed amendments to their respective rules related to the Pre­Opening Session and proposed new rules to allow members to indicate a time upon which their order may become eligible for execution. SEC Release Nos. 34-­76210 and 34-­76211.

Financial Industry Regulatory Authority

FINRA Proposes New Funding Portal Rules.

On October 22nd, the SEC gave notice of the Financial Industry Regulatory Authority’s (“FINRA”) proposed new Funding Portal rules that would apply to SEC­registered funding portals that become FINRA members pursuant to the JOBS Act and the SEC’s Regulation Crowdfunding. The proposal would also create new FINRA Rule 4518 (Notification to FINRA in Connection with the JOBS Act), which would require FINRA registered brokers to provide notification before engaging in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act for the first time or within 30 days of directly or indirectly controlling, or being controlled by or under common control with, a funding portal. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 26, 2015. SEC Release No. 34­-76239.

SEC Grants Accelerated Approval to FINRA’s TRACE Report Indicator Proposal, Seeks Comment on Amendment

On October 16th, the SEC announced that it will approve on an accelerated basis FINRA’s proposal to amend its rules to require firms to identify TRACE reports that do not reflect a commission or mark­up mark­down. The SEC also requested comment on FINRA’s amendment to the proposed rule change, which would provide an exception to the proposed “no remuneration” requirement for inter­dealer transactions. Comments should be submitted on or before November 12, 2015. SEC Release No. 34­-76176.

Municipal Securities Rulemaking Board

MSRB Lengthens Comment Period for Confirmation Disclosure Proposal

On October 20th, the Municipal Securities Rulemaking Board (“MSRB”) announced it has extended the comment period for its confirmation disclosure proposal to align with FINRA’s revised parallel proposal. Comments now should be submitted on or before December 11, 2015. MSRB Regulatory Notice 2015­-19.


NYSE Arca Gains Approval to Adopt New Equity Trading Rules Required to Implement Pillar, Files Amendment

On October 20th, the SEC approved NYSE Arca, Inc.’s (“NYSE Arca”) proposal to adopt new equity trading rules related to the implementation of Pillar, its new trading technology platform, including changes to Trading Halts, Short Sales, Limit Up­Limit Down, and Odd Lots and Mixed Lots. The SEC also requested comment on NYSE Arca’s amendment to the proposed rule, and indicated it would grant accelerated approval of the amendment. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 26, 2015. SEC Release No. 34-­76198.

NYSE Arca Withdraws Managed Fund Shares Listing Standards Proposal

On October 19th, the SEC gave notice that NYSE Arca has withdrawn its proposal to amend its rules to adopt generic listing standards for Managed Fund Shares. SEC Release No. 34­-76186.

Industry News

President Obama’s SEC Nominatons, if Confirmed, Would Create the Most Diverse SEC on Record

On October 20th, DealBook reported that President Obama’s nominations for the SEC, if confirmed by the Senate, would make the SEC the most diverse it has ever been. For the first time, four of the five commissioners would be women, one of whom would be only the third African­American commissioner in the history of the agency. President Obama’s Diverse SEC Nominations.

Investor Advocates Protest Proposals Limiting Disclosure

On October 19th, MarketWatch reported that, at an SEC Investor Advisory Committee meeting last week, several investors strongly objected to a controversial proposal from the Financial Accounting Standards Board (“FASB”) to change the threshold for corporate disclosure. FASB’s proposal changes the definition of materiality that company accountants and external auditors would use when reviewing which financial statement disclosures make it to quarterly and annual reports. The proposal consists of two drafts, which are now open for public comment. One proposal, “Conceptual Framework for Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information,” aims to clarify the concept of materiality and the other, “Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material,” explains how to apply discretion when determining what disclosures make it into financial statements. FASB commented that the updates were intended to “improve the effectiveness of disclosures in notes to financial statements.” MarketWatch Story.