Insights from Winston & Strawn

On March 1, 2016, the European Securities and Market Authority (“ESMA”) released its final report on risks and cost implications of interoperable arrangements between central clearing houses (“CCPs”) that are established under the European Market Infrastructure Regulation (“EMIR”). The 30-page report, which is expected to feed into any similar report that the Commission will prepare and submit to the European Parliament and the Council of the EU, describes the various cross-link scenarios and considers the costs and risks of each, now that interoperability arrangements in the scope of EMIR involving EU CCPs have been approved (pursuant to EMIR’s Article 54).  

The analysis performed in the report is based on the assumption that individual methodologies designed to size the resources of all CCPs party to the interoperability arrangement are robust, prudent, and fulfill EMIR requirements, including the Guidelines and Recommendations, thus excluding the re-assessment of default probabilities of individual CCPs.  

The report commences with a “General Overview” on the interoperable arrangements between CCPs, taking into account the benefits and the impact on costs. It then moves into a section on impact on risks at individual CCP level and assessment of risk-management systems and models, more specifically pertaining to inter-CCP credit risk and operational risk. The report concludes with the notion that the main risk created for “inter-operable CCPs is in the inter-CCP credit risk which is the counterparty credit risk resulting from exposures between interoperable CCPs, i.e. the risk that one CCP, party to an interoperable arrangement, is unable to honor its financial obligations that are due to its interoperable counterparty.”  

If you should have any questions on the new ESMA report, and how it affects your practice, feel free to reach out to your legal counsel in Europe.

Feature: Board Diversity

Despite studies showing that profits go up when women are represented in the boardroom, it may be decades before boardroom equality is reached. Research firm Equilar and The U.S. 30% Club recently conducted a survey of C-level executives at 5,000 U.S. public companies and found that nearly four out of five of the 8,517 female executives surveyed have never served on a board. CFO reported on the survey, which found that 78.5% of the women surveyed have never sat on a board, while only 14% of the female executives surveyed are currently directors. By comparison, 17% of the 81,200 male executives surveyed are serving on boards. Equilar concluded that while “[a] common reason boards cite slow movement toward gender diversity is a limited pool of candidates … these figures expose flaws in the assertion that there are not enough qualified women available for board service.” Only one company, Navient Corp. (formerly known as Sallie Mae), has more women than men on its board. Peter Grauer, chairman of The U.S. 30% Club and of Bloomberg L.P., stated in a press release that “Equilar’s study indicates too many organizations are still failing to consider thousands of qualified, board-ready women, missing a valuable opportunity to gain from the greater discourse, stronger decision-making process, and better outcomes associated with diverse boards.”  

A recent report compiled by the Peterson Institute for International Economics and EY, which examined data from about 22,000 companies in 91 countries, found that companies with at least 30% women in leadership roles may boost their net profit margins by about 15% compared with those with no female leaders. And, in a December 2015 report from the Government Accountability Office (“GAO”) entitled, Strategies to Address Representation of Women Include Federal Disclosure Requirements, the watchdog determined that women hold roughly 16% of seats in corporate boardrooms, despite making up approximately half of the workforce, and may not reach the 50-50 mark until more than 40 years from now. The GAO report also outlined how other countries are addressing gender diversity in the boardroom: Germany requires that 30% of board seats at certain public companies go to women; Norway requires that 40% of board seats at certain public companies go to women; and Australia and Canada require companies that do not comply with government-suggested approaches to board diversity to explain why they do not comply.  

In addition, the GAO report noted more specifically that many companies, when defining “diversity,” include characteristics such as relevant knowledge, skills, and experience, which leads companies to provide information across a range of ethnic, gender and socioeconomic factors. Under this sort of wide-ranging definition, a company could essentially categorize a board candidate as “diverse” merely based on the industry in which he works or has worked. As a result of this loophole, according to the GAO report, the Securities and Exchange Commission’s (“SEC”) current rules for disclosing boardroom diversity “may not yield useful information” (as of 2009, the SEC requires public companies to reveal whether and how they consider diversity in identifying director nominees and, if boards have a diversity policy already in effect, they are further required to disclose how that policy is executed and how they assess its value).  

The SEC says that 2016 is the year for board diversity to be thoroughly examined. On January 26th, SEC chair Mary Jo White stated in a keynote speech at the Securities Regulation Institute that board diversity is a priority for the regulatory agency in 2016, which will likely be her final full year as chair. Chair White said that her staff is reviewing the agency’s current rules for disclosing boardroom diversity, which could lead to new guidelines. Chair White indicated that the current SEC rules do not specifically define diversity “because obviously diversity can mean a lot of things.” She added that the SEC has received petitions urging it to offer a more unambiguous definition. One petition, which was submitted by public fund fiduciaries in 2015, encouraged the SEC to require that companies disclose each director nominee’s gender, race and ethnicity, as well as their skills and experiences, in a chart or matrix format. Petitioner Anne Simpson, director of global governance for the California Public Employees Retirement System, explained that board diversity is “vital to board effectiveness … We need diversity because investors are protected when boards bring challenge and a variety of perspectives to critical issues. We also need diversity because boards which confine their recruitment to candidates who look and think like the incumbents are missing out on talent and ability which can drive the company’s success.” Chair White responded that the petition’s concerns are “well-founded” and that her staff is now examining disclosures under the current rule, “with an eye towards … whether we need additional guidance or rulemaking.”  

Notwithstanding Chair White’s comments, Congressional Democrats feel that the SEC is dragging its feet on requiring corporate boards to detail their diversity by publicly disclosing the racial and gender composition of board nominees. In a letter sent to Chair White on March 2nd, key Democrats wrote that “[w]hile we applaud your decision to have SEC staff review [the issue], we are disappointed with the amount of time the SEC is taking to examine and seek public comment on this important and widely supported proposal.” Maintaining that minorities and women are considerably underrepresented in corporate boardrooms, the lawmakers urged the SEC to force corporations to document the racial mix of the panels by immediately seeking public comment on the proposal.

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


Federal Banking Regulatory Agencies Clarify Expectations for Use of Property Evaluations

On March 4th, the Office of the Comptroller of the Currency (“OCC”) announced that the federal banking regulatory agencies have issued an advisory to clarify expectations for the use of property evaluations by banking institutions. The advisory responds to questions raised during outreach meetings held by the agencies last year pursuant to the Economic Growth and Regulatory Paperwork Reduction Act. OCC Press Release.

OCC Hosts Nebraska Workshop for Bank Directors

On March 2nd, the OCC announced that it will host a workshop in Omaha, Neb., at the Magnolia Hotel Omaha, April 4-6, for directors of national community banks and federal savings associations supervised by the OCC. The workshop will combine lectures, discussion, and exercises to provide practical information on the roles and responsibilities of board participation for both new and experienced directors. OCC Press Release.

Interagency Guidance Issued

On March 1st, the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) jointly issued the “Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks,” which addresses funding risk and contingent liquidity risk for national banks and federal savings associations with consolidated assets of $250 billion or more. OCC Bulletin.

OCC Releases CRA Evaluations for 14 National Banks and Federal Savings Associations

On March 1st, the OCC released a list of Community Reinvestment Act (“CRA”) performance evaluations that became public during the period of February 1, 2016 through February 29, 2016. The list contains only national banks, federal savings associations, and insured federal branches of foreign banks that have received ratings. The possible ratings are outstanding, satisfactory, needs to improve, and substantial noncompliance. OCC Press Release.

OCC Issues Second Quarter 2016 CRA Evaluation Schedule

On February 29th, the OCC released its schedule of CRA evaluations to be conducted in the second quarter of 2016. OCC Press Release.

Treasury Department Developments

FinCEN Proposes Revising FBAR Rules for Certain Financial Professionals

On March 1st, the Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemakingintended to revise and clarify certain provisions in the rules regarding the filing of Reports of Foreign Bank and Financial Accounts (“FBAR”). The revisions would mainly apply to financial professionals who file FBARs due to their employment responsibilities. FinCEN Press Release.

Securities and Exchange Commission


Updated Volcker Rule Guidance

The federal financial regulators published new guidance on March 4th concerning the implementation of the Volcker rule, the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibiting proprietary trading. The revised guidance contains additional information regarding the capital treatment of banking entity investments in collateralized debt obligations backed by trust preferred securities. See, e.g.,CFTC Guidance. See also SEC Volcker Rule FAQs (containing all SEC staff guidance on the Volcker rule).

SEC Updates Guidance on Registration of Funding Portals

The SEC published an updated version of its small entity compliance guide concerning the registration of funding portals for crowdfunding transactions on February 29th. The updated guidance contains instructions for completing the Form ID application process to gain access to EDGAR, which is required for funding portals to submit the required Form Funding Portal during the registration process. Funding Portals Registration Compliance Guide.

Speeches and Statements

Grim Indicates Investment Management Will Prioritize ETFs, Private Funds, Disclosure, and Fund Oversight

In an address to the 2016 PLI Investment Management Institute on March 3rd, SEC Division of Investment Management Director David Grim used the themes highlighted during the recent commemoration of the 75th anniversary of the Investment Company and Investment Advisers Acts to provide an overview of the investment management industry. Grim  discussed the Division’s focus on developing rules concerning exchange-traded funds, improving the effectiveness of disclosure, utilizing newly-available information regarding private fund advisers, and developing guidance and policy to support the oversight function of fund boards. Grim Remarks.

Luparello Reviews SEC’s Efforts in Equity Market Structure for Senate Banking Committee

SEC Division of Trading and Markets Director Stephen Luparello testified before the Senate Committee on Banking, Housing, and Urban Affairs on March 3rd regarding the SEC’s efforts to enhance equity market structure. In his testimony, Luparello provided an overview of the SEC’s program for equity market structure, noting its review of market structure is data driven, comprehensive, and open to a wide range of views. Luparello also highlighted notable developments in equity market structure during 2015 and current SEC regulatory initiatives relating to market structure. Luparello Testimony.

Piwowar Condemns “One-Size-Fits-All” Approach to Credit Retention Rules for Securitizations

In remarks at ABS Vegas 2016 on March 1st, SEC Commissioner Michael S. Piwowar discussed recent regulatory efforts by the SEC concerning securitizations, emphasizing his disagreement with the SEC’s adoption of a joint-agency rule requiring mandatory credit risk retention. Piwowar objected to the homogeneous approach of the rule, which requires a five percent risk retention requirement across asset classes, and criticized “prudential regulators in Washington, D.C., [who] took the easy way out” rather than determining the best risk retention rate for each asset class. Piwowar Remarks.

Commodity Futures Trading Commission

President Obama Will Nominate Two New Members to Fill CFTC Vacancies

On March 3rd, Bloomberg BNA reported that President Obama is set to nominate two new members to fill Commodity Futures Trading Commission (“CFTC”) vacancies. Chris Brummer, a professor at Georgetown University Law Center, will be the Democratic nominee. Brian Quintenz, who runs his own money management firm and was an aide to former U.S. Representative Deborah Pryce, is the Republican pick. The five-member CFTC, which was given new powers to supervise the over-the-counter derivatives market in the wake of the 2008 financial crisis, has been operating without a full slate of commissioners. Brummer and Quintenz must be confirmed by the Senate. Bloomberg BNA.

Federal Rules Effective Dates

Click here to view table.

Exchanges and Self-Regulatory Organizations

Financial Industry Regulatory Authority

FINRA Proposes Shortened Settlement Cycle for Securities in the U.S. Secondary Market

The Financial Industry Regulatory Authority (“FINRA”) requested comments on March 4th regarding proposed rule amendments that would shorten the settlement cycle from trade date plus three business days (“T+3”) to trade date plus two business days (“T+2”) for securities in the U.S. secondary market, including transactions in equities, unit investment trusts, and corporate and municipal bonds. Comments should be submitted on or before April 4, 2016. FINRA Regulatory Notice 16-09.

FINRA Chair Faces Tough Questions Regarding Enforcement Effectiveness From Senate Subcommittee

FINRA Chair Richard G. Ketchum testified before the Senate Subcommittee on Securities, Insurance and Investment on March 3rd regarding current issues and FINRA’s regulatory efforts relating to equity market structure, including its work on market fairness, market transparency, market liquidity and volatility, and small company issues. Ketchum Testimony. According to a report in Investment News, Senator Elizabeth Warren questioned Ketchum regarding FINRA’s effectiveness at enforcement, citing studies that brokers fired for misconduct reenter the industry within a year and that $62 million in FINRA arbitration awards from 2013 remain unpaid.

FINRA Proposes New Reporting Requirements for ATSs

On March 1st, the SEC requested comments on a proposed rule change filed by FINRA that would require alternative trading systems (“ATSs”) to report additional ATS-specific data in Order Audit Trail System (“OATS”) reports for orders involving NMS stocks. Under the proposal, ATSs would be required to report information regarding re-pricing events and order display and reserve information, as well as additional information related to the receipt and execution of NMS stock orders. Display ATSs and ATSs that operate as ADF Trading Centers would be subject to additional reporting requirements. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of March 7, 2016. SEC Release No. 34-77269.

FINRA Moves Forward with Plan to Require Disclosure of Mark-Ups for Fixed-Income Securities Transactions

FINRA announced on February 26th that its Board of Governors has approved a proposal that would require member firms to disclose the mark-up or mark-down for most transactions in corporate and agency debt securities on retail customer confirmations. The requirement would not apply to transactions in fixed-price new issues or in cases where the bonds sold to or bought from a retail customer were held by the firm for less than a day. FINRA will submit the proposal to the SEC for approval. FINRA Press Release.

International Swap and Derivatives Association

ISDA Provides Classification Letter for Counterparties Clearing OTC Derivatives in Australia

On March 3rd, the International Swaps and Derivatives Association (“ISDA”) published a clearing classification letter for use by counterparties to communicate their status for clearing requirements under Australia’s over-the-counter derivatives central clearing framework. The ISDA Clearing Classification Letter, which is based on a classification letter prepared under the requirements of the European Market Infrastructure Regulation (“EMIR”), contains a series of questions that parties may use to report their status for clearing and other regulatory requirements under the Australian Securities and Investments Commission’s (“ASIC”) Derivative Transaction Rules (Clearing) 2015. ISDA Press Release.

ISDA OTC Derivatives Compliance Calendar

On March 1st, the ISDA published an updated version of its OTC Derivatives Compliance Calendar.

Municipal Securities Rulemaking Board

MSRB Releases Annual Fact Book of Municipal Securities Data

The Municipal Securities Rulemaking Board (“MSRB”) published its annual Fact Book, which provides municipal securities market data including comprehensive and historical statistics on municipal market trading patterns, information on continuing and primary market disclosure, and interest rate resets for municipal variable rate securities. Data from the Fact Book indicated that overall municipal bond trading volume declined by 13 percent in 2015, but the number of municipal securities trades increased by 8.91 million trades. MSRB Press Release.

National Futures Association

NFA Includes New Cybersecurity Section in Self-Examination Questionnaire

On February 29th, the National Futures Association (“NFA”) announced that it has added a new section to the Self-Examination Questionnaire to address cybersecurity. The NFA created the cybersecurity section to assist members is developing and implementing the written information systems security program required under the Cybersecurity Interpretive Notice, which became effective on March 1, 2016. NFA Notice 16-I-10.


NYSE Offers Guidance on Revised Account Type Indicators

The New York Stock Exchange LLC (“NYSE”) published an Information Memo on February 29th that provides responses to frequently asked questions regarding revisions to the list of Account Type Indicators, which provides a definitive source of definitions of Account Type Indicators for reporting requirements. The amended list reduces the list of identifiers from 24 to four and reflects a new Account Type Indicator for denoting Riskless Principal transactions. Firms must make all necessary changes to conform to the amended list by August 1, 2016.NYSE Information Memo 16-2.

Judicial Developments

Plaintiffs Suing Drug Defendants Fail to State a Claim as to Statements Regarding Likelihood of FDA Approval

Plaintiffs contended that the Sanofi Pharmaceuticals defendants misled investors regarding the clinical testing of their breakthrough drug, which is designed to treat multiple sclerosis, by failing to disclose that the FDA had expressed concern regarding the use of single‐blind (as opposed to double-blind) clinical studies. On March 4th, the Second Circuit affirmed dismissal for failure to state a claim, holding that even with the benefit of the Supreme Court’s expanded standard for liability under Omnicare, plaintiffs failed to state a claim as to the statements regarding the likelihood of FDA approval. Sanofi.

Panel Declines Challenge to Jury Instruction in Securities Fraud Case.

Appellant, the former CFO of pharmaceutical company Stiefel, sold his stock back to Stiefel a few months before it was acquired by a larger company and the value of its stock rose substantially. He then sued Stiefel for violating Rule 10b-5. Following a jury verdict in Stiefel’s favor, the appellant argued that the district court erred in declining to tell jurors that Stiefel had a “duty to disclose all material information” in the run-up to the merger. The Eleventh Circuit affirmed on March 1st, holding that Rule 10b-5(b) does not prohibit a mere failure to disclose material information. Stiefel.

Industry News

State Street Global Advisors Is Introducing SPDR Gender Diversity Index Exchange-Traded Fund

On March 4th, The New York Times reported that State Street Global Advisors will be introducing its 159th exchange-traded fund (“E.T.F.”), the SPDR Gender Diversity Index E.T.F., on March 8th. The fund’s objective is to attain market-rate returns by investing in U.S. companies that “are leaders in advancing women through gender diversity on their boards of directors and in management.” It will track an index of 125 to 150 stocks that have been culled from the Russell 1000 index and have scored high on a scale of gender metrics. The New York Times.

New York Brokers Liable for Trading on Tips About IBM Acquisition.

On February 29th, Reuters reported that, despite a major appeals court ruling that made insider trading cases harder to pursue, a federal jury has found two former New York stockbrokers liable for trading on confidential tips about an IBM Corp. acquisition. Reuters. See also Ceresney Statement.