Insights from Winston & Strawn

Daniel Sibears, Executive Vice President for Regulatory Operations at the Financial Industry Regulatory Authority (“FINRA”), gave a speech at a Securities Industry and Financial Markets Association event in which he discussed the mitigation obligations of securities firms after a cyberbreach. After experiencing a cyberbreach, securities firms should consider whether they have taken reasonable steps to mitigate a potential intrusion or data leak.

In his speech, Sibears further discussed when securities firms are required to report a data breach to regulators, such as when it would materially impact the firm’s business operations. Banking regulators require lenders and depositories to report data breaches, but securities firms do not fall under the same general mandate. Vincente Martinez, the chief of the SEC’s Office of Market Intelligence and a panelist at the event, recommended that firms get in touch with the SEC early if they experience a breach and they anticipate needing to seek cooperation  credit for working with the SEC or an exemption from regulatory requirements.

Anne Maglione

Feature: The Fair and Effective Financial Markets Review

On June 10th, the Bank of England, the United Kingdom (“U.K.”) Treasury, and Britain’s Financial Conduct Authority jointly published the Fair and Effective Financial Markets Review (“FEMR”) in an effort to restore trust in financial fixed income, currencies and commodities (“FICC”) markets, including associated derivatives and benchmarks. The FEMR, which recommends guidelines, standards and penalties on both individuals and firms, was brought about in response to public demand for harsher consequences for misconduct following a spate of recent scandals, such as London Interbank Offered Rate (“Libor”) and Spot FX (“Foreign Exchange”) benchmark manipulation, that have to date cost global banks $150 billion in fines, reducing their lending capacity by $3 trillion.

“This is a major opportunity for the industry to establish common standards of market practice, Bank of England Governor Mark Carney commented to the finance industry upon release of the FEMR. “If firms and their staff fail to take this opportunity, more restrictive regulation is inevitable.” Carney, who is also chairman of the Financial Stability Board, noted that bankers’ misconduct has occurred with a “depressing frequency.”

The Wall Street Journal surveyed a variety of market participants for initial feedback on the FEMR. See their comments here.

Click here to view a June 11 Reuters article that discusses the impact the FEMR could have on the industry.

FEMR Recommendations at a Glance

In an effort to improve conduct in FICC markets, the FEMR recommends the following short­term actions: (1) raise standards, professionalism and accountability of individuals, including increased jail sentences for violations and the prevention of staff “recycling” via poor conduct records; (2) improve the quality, clarity and market­wide understanding of FICC trading practices by creating a new FICC Market Standards Board that will promote adherence to standards; (3) strengthen regulation of FICC markets in the U.K. by, among other things, creating a new statutory civil and criminal market abuse system for the Foreign Exchange; (4) launch international action to raise standards in global FICC markets by providing a comprehensive set of principles to govern trading practices around things like market integrity and information handling; (5) promote fairer FICC market structures while also enhancing effectiveness by improving transparency; and (6) adopt a more forward­looking approach to conducting risk identification and mitigation through enhanced surveillance of trading patterns and behaviors.

Four Key Questions Addressed by the FEMR

What do ‘fair’ and ‘effective’ mean for FICC markets?

The FEMR describes “fair” FICC markets as those that have (1) clear, proportionate and consistently applied standards of market practice; (2) contain enough transparency to allow users to verify that those standards are consistently applied; (3) provide open access; (4) allow market participants to compete on a merit basis; and (5) provide confidence that participants will behave with integrity.

The FEMR describes “effective” FICC markets as those that also (1) allow end­users to undertake investment, funding, risk transfer and other transactions in a predictable way; (2) are underpinned by robust trading and post­ trade infrastructures enabling participants to source available liquidity; (3) enable market participants to form, discover and trade at competitive prices; and (4) ensure proper allocation of capital and risk.

Where have fairness and effectiveness of FICC markets been deficient, focusing in particular on the root causes of recent misconduct?

The FEMR notes that while FICC markets do have a wide range of positive characteristics, recent misconduct has damaged public trust and impaired market effectiveness. While both firms and the individuals involved bear responsibility for these costly abuses, the FEMR determined that their misconduct has generally reflected a  range of deeper root causes that are specific to particular FICC markets or business models. These root causes include market structures that present opportunities for abuse; standards of acceptable market practices; systems of internal governance and control; limited reinforcement of standards through bilateral market discipline, remuneration and incentive schemes; and a culture of impunity.

The FEMR concluded that a combination of these root causes is what has contributed to an “ethical drift” where unethical behavior has gone unchecked, has subsequently become more widespread, and then has ultimately been accepted as the norm.

To what extent are the necessary reforms already completed or underway?

The FEMR cites a considerable amount of progress that has already been made in identifying and rectifying  these deficiencies. This progress includes: (1) an overhaul of the design and oversight of key FICC benchmarks, which proximately caused many recent misconduct cases; (2) the improvement of transparency in some FICC markets; (3) action taken by competition authorities in Europe and elsewhere against anti­competitive behavior  in FICC markets; (4) clarification or strengthening of some standards of market practice; (5) significant improvement in the framework for ensuring that compensation is aligned with risk; (6) efforts to improve firms’ internal governance, accountability and control structures; (7) wide­ranging reforms in sell­side firms; and (8) fines and other enforcement measures that have made individuals mindful that misconduct will be discovered  and punished.

What gaps remain, and how should they be filled?

The FEMR identifies the following gaps that the current reforms do not cover: (1) the professionalism and accountability of individuals in FICC markets remain too low and variable; (2) key FICC markets lack effective mechanisms for agreeing, disseminating and adhering to common standards of market practice; (3) the coverage of regulation; and (4) raising standards in global markets including those for the Foreign Exchange.

What’s Next?

An Open Forum, which will be held at the Bank of England in the fall of 2015, will provide a chance for a broad range of stakeholders in FICC markets to evaluate the FEMR’s recommendations and address what markets need to do in order to adjust to them.

The U.K. Prudential Regulation Authority

Separately, on Monday, June 8th, the U.K. Prudential Regulation Authority (“PRA”), which focuses its regulations on a smaller group of executives than the FEMR, set out in a Policy Statement its final rules and supervisory statement to accommodate the European Commission’s Delegated Act regarding the liquidity coverage requirement (“LCR”) for credit institutions. Pursuant to the revised proposals, firms that were formerly required to comply with daily reporting against the whole range of common reporting (“COREP”) liquidity returns will now   only need to provide daily reporting for a portion of the returns. In addition, instead of having third­country branches provide whole­firm liquidity information through COREP returns, the PRA will not determine the specific format of the required returns.

In a Supervisory Statement published on Monday, June 8th, the PRA set out its approach to supervising liquidity and funding risks, covering its expectations in relation to:

  • the Internal Liquidity Adequacy Assessment Process, which requires firms to identify, measure, manage and monitor liquidity and funding risks across different time zones and stress scenarios
  • the Liquidity Supervisory Review and Evaluation Process, which is proportionate to the nature, scale and complexity of a firm’s activities
  • drawing down Liquid Asset Buffers, as required in times of stress
  • collateral placed at the Bank of England, designed to increase the availability and flexibility of liquidity insurance
  • daily reporting under stress, which is additional or more frequent reporting of liquidity positions

Finally, a Monday, June 1st PRA Supervisory Statement, addressed to U.K. Solvency II firms and Lloyd’s, lays out its expectations of firms applying for permission to apply a volatility adjustment (“VA”). The statement describes:

  • items that should be including in an application to use the VA
  • how the PRA will use the content of applications to assess whether the statutory conditions for approval to use the VA have been satisfied
  • how the VA approval process will work

Banking Agency Developments

FDIC Sets Deadline for Summary of Deposits Survey

On June 12th, the Federal Deposit Insurance Corporation (“FDIC”) announced the deadline for its annual Summary of Deposits survey as of June 30 for all FDIC­insured financial institutions.  The required survey of branch office deposits must be submitted by July 31, 2015; the agency expects to release the results of the survey by October 1, 2015.  FDIC Financial Institutions Letter.

OCC Improves Access to Comments on Business Combination Applications

On June 12th, the Office of the Comptroller of the Currency (“OCC”) announced that it has improved public  access to information and comments regarding business combination corporate applications, allowing the public to view and submit comments on these applications on a single page accessible through its website or licensing page.  OCC Press Release.

OCC Emphasizes Risk Compliance, Role of Boards in Bank Supervision

On June 9th, Comptroller of the Currency Thomas Curry, in a speech before the Prudential Regulation Conference, discussed the value of prudential supervision and its importance in ensuring the safety of the federal banking system. Curry highlighted prudential supervision as a key defense against financial instability and outlined the measures the OCC has taken to improve the supervision of national banks, including heightened standards for large financial institutions’ risk compliance framework and for the responsibilities of their boards of directors. OCC Press Release.

OCC’s Curry Discusses Emerging Payments and Cybersecurity

On June 3rd, Comptroller of the Currency Thomas Curry addressed the BITS Emerging Payment Forum, discussing the role of traditional banks in developing emerging payment technologies and the steps the OCC is taking to address cybersecurity threats that have increased with the growth of e­banking facilities. OCC Press Release.

OCC Releases Mid­Cycle Status Report

On June 3rd, the OCC issued its mid­cycle status report on its Fiscal Year 2015 operating plan, reporting on key actions to date and priority objectives for the remainder of the year. OCC Press Release.

Financial Agencies Release Statement on Dodd­Frank Stress Tests

On June 2nd, the OCC, FDIC, and the Board of Governors of the Federal Reserve System (“FRB”) released a joint statement reiterating the disclosure requirements for the annual stress tests conducted by financial institutions with total consolidated assets between $10 billion and $50 billion. The companies are required to disclose information used in the stress tests such as description of the types of risks; methodologies used; estimates of losses, revenue and net income; post­stress capital ratios; and causes for changes in regulatory capital ratios. Results must be disclosed between June 15 and June 30. Joint Release.

OCC and Other Bank Agencies Seek Comment on Outdated or Unnecessary Regulations

On May 29th, the OCC, the FRB, and the FDIC seek comment on regulations related to consumer protection; directors, officers, and employees; and money laundering. This is in addition to comments previously requested on six other categories as required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (“EGRPRA”). Comments are due by September 3, 2015. Notice.

Vanguard Opposes FSB’s Too­Big­to Fail Plan

On May 30th, Vanguard Group Inc., according to Bloomberg, expressed disappointment with the Financial Stability Board’s (“FSB”) plan to identify too­big­to­fail investment funds. Vanguard says rather than focusing on individual fund managers because of their size or type, the FSB should look at activities that increase risk. Mutual funds, for example, should be getting the same treatment as pension funds since their assets are long­term. Vanguard. On May 28th, Fidelity sent its comments to the FSB. Fidelity.

Treasury Department Developments

Treasury Department Plans Auction of Remaining TARP Assets

On June 11th, the Treasury Department announced that it will hold auctions to sell several of its preferred stock Capital Purchase Program (“CPP”) investments as part of its efforts to conclude the Troubled Asset Relief Program (“TARP”).  The auctions will begin on or around June 15, 2015, and are expected to close on June 18, 2015, by 6:00 pm Eastern time.  The auctions will be open only to domestic qualified institutional buyers, domestic institutional accredited investors with total assets of more than $25 million, and certain directors or executive officers of the issuers of the preferred stock CPP investments. Treasury Department Press Release.

CFPB Will Supervise Nonbank Auto Finance Companies

On June 10th, the Consumer Financial Protection Board (“CFPB”) issued a final rule allowing the agency to oversee large nonbank auto loan companies. The rule will apply to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases per year.  The agency also updated its examination procedures for supervising bank and nonbank auto finance companies to coincide with the rule. The final rule will take effect 60 days after publication in the Federal Register, which is expected shortly. CFPB Press Release.

DOJ Investigates Possible Manipulation of U.S. Treasuries

On June 10th, Bloomberg reported that the Justice Department has launched another investigation, this time focusing on possible collusion in the U.S. Treasury market. News of the investigation comes on the heels of charges against several large financial institutions of manipulation of foreign­exchange markets and interest rates. Volatile trading last October in U.S. Treasuries raised concerns about the effects of electronic trading on  the stability of the market. The report noted that although it is the largest government­bond market and serves as a global benchmark for borrowers and savers, the U.S. Treasury market is lightly regulated, leaving it vulnerable to the effects of high frequency trading and traders who engage in spoofing to manipulate markets. Treasury Market Probe.  Bloomberg also reported that, in response to these concerns, the Treasury Market Practices Group released guidelines for trading in the U.S. Treasury market, recommending traders employing high  volume trading strategies create plans to alter those strategies to avoid market disruption. Trading Guidelines.

CFPB Issues Advisory Regarding Misleading Reverse Mortgage Ads

On June 4th, the CFPB released the results of a study which concludes advertisements for reverse mortgages confuse consumers, creating the false impression that reverse mortgages are a government benefit that would guarantee financial stability and the ability for elderly homeowners to remain in their homes for the rest of their lives.  The CFPB issued an advisory in response to the study’s conclusions. CFPB Press Release.

Mortgage Company Charged in Interest Rate Compensation Scheme

On June 4th, the CFPB filed a complaint against mortgage company RPM Mortgage, Inc. and its chief executive officer, alleging the company instituted a compensation plan that illegally awarded bonuses and incentives to loan officers who steered consumers toward mortgage loans with higher interest rates. RPM deposited profits  tied to the loans’ interest rates in purported employee expense accounts, paying bonuses from the accounts and eventually allowing its loan originators to tap the accounts to supplement commissions on future transactions  and to finance pricing concessions to close loans they would have otherwise lost. CFPB Press Release.

House Republicans Ask for FSOC Records

On May 29th, Bloomberg reported that chairman of the House Financial Services Committee, Representative Jeb Hensarling, and the heads of five of the subcommittees, sent a letter to the Financial Stability Oversight Council (“FSOC”) requesting the non­public records related to the process of designating companies as systemically important. The FSOC said it would respond to the letter. Systemically Important.

Securities and Exchange Commission

Exemptive Orders

SEC Denies Application for Limited Volume Exemption from Registration as a National Securities Exchange

On June 11th, the Securities and Exchange Commission (“SEC”) denied Automated Matching Systems Exchange, LLC’s (“AMSE”) application for a limited volume exemption from registration as a National Securities Exchange under the Securities Exchange Act of 1934. The SEC determined that the application was fatally flawed, as AMSE proposed to possess the broad regulatory powers and responsibilities that are normally reserved for SROs, while simultaneously seeking exemption from registration as an exchange. The SEC noted that allowing an exempt exchange to possess the broad range of regulatory powers and responsibilities of an SRO would be contrary to the Act and inconsistent with the public interest and the protection of investors. SEC Release 34­75157.


Responses to Frequently Asked Questions Regarding the “Volcker Rule.”

On June 12th, the SEC Divisions of Trading and Markets, Investment Management, and Corporation Finance provided further guidance on the Commission’s final rule implementing section 13 of the Bank Holding Company Act of 1956 (“BHC Act”), commonly referred to as the “Volcker Rule.” Staff added guidance on joint venture exclusion for covered funds and how the final rule applies to a foreign public fund sponsored by a banking entity. SEC FAQ.

Statements and Speeches

The Reports of IFRS’s Death Are Greatly Exaggerated.

On June 5th, James Schnurr, Chief Accountant, Office of the Chief Accountant (OCA), in his remarks at the 34th

Annual SEC and Financial Reporting Institute Conference, disagreed with former Chairman Cox’s comments at last year’s conference that the time was right to “bury International Financial Reporting Standards (“IFRS”) not to praise them.” Schnurr argued that while consultation had shown there was broad support for a single set of high­ quality, globally accepted accounting standards, the question remains “what is the path to achieve that objective and how do we get there?” He added that his staff continues to monitor implementation of the new revenue recognition standard to encourage consistent application not only in the U.S., but globally. Schnurr was also pleased that the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) plan to amend the guidance for the revenue recognition standard to provide further clarity on performance obligations. Schnurr concluded that his staff is developing a recommendation to the SEC in the form of a concept release to seek feedback on how investors currently use the information provided in audit committee disclosures, along with feedback on the usefulness of potential enhancements, including additional disclosures.

SEC Warns Structured Note Issuers over Proprietary Indexes

On June 5th, the SEC published comments delivered by Amy Starr, Chief, Office of Capital Market Trends, at the May 14, 2015 Structured Products Americas Conference. In her keynote address, Starr argued that for the purposes of linked securities, enhanced disclosure was required for the referenced security, index or other asset, asking “whether the disclosures provide the investors with sufficient information about the terms of the security in order to make informed investment decisions, both at issuance and on an ongoing basis through the life of the linked security.” Starr concluded by asking whether brokers or advisors selling structured notes to the investor could explain in plain English how the product works and, more importantly, how it pays out­­the litmus test   being, does the disclosure do that?

Other Developments

Request for Comment on Exchange­Traded Products

On June 12th, the SEC published a request for public comment to help inform its review of the listing and trading of new, novel, or complex exchange­traded products (“ETPs”). The Commission is seeking to address “arbitrage mechanisms and market pricing for ETPs, legal exemptions and other regulatory positions related to the trading of ETPs, and securities exchange listing standards for ETPs.” SEC Release 34­75165. The public comment period will remain open for 60 days following publication of the comment request in the Federal Register. SEC Press Release.

Commissioners Call Time on SEC’s “Anachronistic” Transfer Agent Rules

On June 11th, Commissioners Luis A. Aguilar and Daniel M. Gallagher released a statement urging the SEC to publish proposed rule changes to update the outdated transfer agent rules. The Commissioners argued that immediate action was needed to revise the 30­year­old rules, arguing that publication of a Division of Trading   and Markets Concept Release, although laudable, would introduce “a lengthy delay in updating the  Commission’s transfer agent rules [that] would be bad for the markets, investors, and issuers.” The Commissioners’ recommendations seek to better protect investors and issuers by updating and, where appropriate, making the Commission’s transfer agent rules more comprehensive. In addition the  recommendations would provide transfer agents with much needed guidance as it relates to their important role as gatekeepers. The back office functions of transfer agents have traditionally been lightly regulated; the Commissioners argued that revising the rule would help bolster the SEC’s increasing efforts to crackdown on fraudulently transferred microcap securities. See Reuters. Commissioner Michael S. Piwowar and Commissioner Kara M. Stein later released a short statement in which they concurred with Commissioners Aguilar and  Gallagher. Statement of Support.

Singing the Praises of the Legal Entity Identifier

On June 10th, Commissioner Kara M. Stein reminded her audience at the Meet the Market, North America Conference that as the financial crisis raged in 2007­2008, “[n]either regulators nor market participants could fully evaluate risk exposures or interconnectedness. Opacity fueled uncertainty, and that uncertainty sparked fears that ultimately froze the credit markets and shook the financial system.” Out of this turmoil and disorder arose the Office of Financial Research (“OFR”). In 2010, the OFR issued a policy directive announcing its intention to adopt a universal standard to identify legal entities. A broad collation of regulators and market participants have since worked to create a global standardized Legal Entity Identifier (“LEI”), which will enable regulators and organizations to more effectively measure and manage counterparty exposure while also resolving long standing issues on entity identification across the globe. Put simply, “[t]his small but mighty tool has the power to help us prevent another financial crisis.” Stein outlined how the Commission is mandating adoption of LEIs through enshrining it use through rulemaking. In addition, Stein discussed the cooperation created between participants as a model for future improvement to global data aggregation and usability, concluding with remarks regarding the holy grail of a single standard for entity identification, the unique product identifier (“UPI”) and a unique trade identifier (“UTI”). Stein remarks.

Financial Regulators’ Diversity Policy Issued

On June 9th, the SEC, CFPB, OCC, FRB, FDIC and the National Credit Union Administration (“NCUA”) issued an interagency  policy statement mandated by the Dodd­Frank Act. The policy statement provides a framework for regulated entities to create and strengthen their diversity policies and practices. Each agency is required to establish an Office of Minority and Women Inclusion (“OMWI”) to oversee the policy at the agencies’ regulated entities. The agencies consulted with more than 200 members of the public and the financial services sector to gain a greater understanding of the issues confronting minorities and women in obtaining employment and business opportunities within the financial services industry. Comments are due within 60 days of being published in the Federal Register which is expected shortly. SEC Press Release See also Compliance Week.

Dissenting Voice – Missed Opportunity to Advance Diversity and Inclusion

On June 9th, Commissioner Luis A. Aguilar issued a statement dissenting from the Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated  by the Agencies, which was issued by the SEC and a number of other financial regulators. Aguilar argued that  the voluntary nature of the requirements had rendered the policy ineffective: “Future policy change to the demographics in the financial services industry now relies on the mere hope that companies will act in good faith to use the standards outlined in the Final Policy Statement and conduct effective self­assessments, and to use   the information derived from these self­assessments to promote diversity and inclusion.” In addition, he advanced the position that the agencies could have made provision for the identification of entities that failed to conduct self­assessments. Aguilar went as far as suggesting that the SEC missed an opportunity by not using its rulemaking powers to require self­assessment which would then be made public.

Staff Announcements

On June 8th, the SEC named Richard R. Best as Regional Director of its Salt Lake office. Mr. Best joins the SEC from the Financial Industry Regulatory Authority (“FINRA”) in New York, where he is a senior director and chief counsel in its Department of Enforcement.

SEC to Release Registration “No­Review” Letters

On June 5th, the SEC’s Division of Corporation Finance announced that, in the interests of transparency, they will begin releasing through the EDGAR system correspondence with issuers relating to Securities Act registration statements that are not selected for review.

Commodity Futures Trading Commission

CFTC Finalizes Rule on Accountant Unprofessional Conduct

On June 10th, the Commodity Futures Trading Commission (“CFTC”) published a final rule amending its regulations to clarify the standard used to determine when an accountant has engaged in improper or unethical professional conduct and is subject to a temporary or permanent suspension of the privilege to practice before the commission. The rule is effective July 10, 2015. CFTC Final Rule.

CFTC’s Massad Suggests Plan to Close Loopholes in Swaps Transactions

On June 9th, The Wall Street Journal summarized the remarks of CFTC Chair Timothy Massad before the Futures Industry Association (“FIA”) International Derivatives Conference in London. In his speech, Massad indicated the CFTC is considering new rules requiring foreign affiliates of U.S. financial institutions to adhere to U.S. regulations regarding swap trading even in cases where the U.S. parent company has refused to guarantee the swaps issued by its foreign affiliate. By tightening restrictions on these transactions, Massad’s approach, which is still under internal discussions, would prevent banks from skirting strict CFTC regulations of swaps by moving transactions overseas and help alleviate risks to U.S. financial institutions. Swaps Loophole.

CFTC Chair Anticipates Agreement on U.S.­EU Derivatives Rules

On June 9th, Reuters reported that the United States and the European Union are making progress toward aligning their derivatives rules. According to the article, CFTC Chairman Timothy Massad is optimistic that an agreement will be reached this summer. A key point of disagreement between the U.S. and EU regulators has been the amount of margin required to cover potential losses: EU derivative rules require the margin to cover a two­day period, while U.S. rules require coverage for a one­day period. Derivatives Rules.

CFTC Grants No­Action Relief to Overseas Participants in International Financial Institution Swap Transactions

On June 5th, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued a no­action letter which recommended that the CFTC refrain from pursuing action against persons located outside of the U.S. who facilitate swap transactions for International Financial Institutions (“IFIs”) with offices in the U.S. for failure to register as an introducing broker or commodity trading advisor. The Division based its recommendation on the unique attributes and status of IFIs and additionally noted that the recommendation is consistent with the CFTC’s prior treatment of IFIs.  CFTC Press Release.

CFTC Seeks Comments on Petition for DCO Registration Exemption

On June 3rd, the CFTC requested public comment on a petition by ASX Clear (Futures) Pty Limited for exemption from registration as a derivatives clearing organization (“DCO”). This is the first time the CFTC has considered a petition for exemption from registration under Section 5b(h) of the Commodity Exchange Act, which permits the CFTC to grant exemption from registration if it determines the DCO is subject to comparable supervision by government authorities in its home country. Comments should be submitted on or before June 17, 2015.  CFTC Press Release.

CFTC Chairman Massad Outlines Plans for Algorithmic Trading Regulations

On June 3rd, the CFTC chairman Timothy Massad, in a speech before the Global Exchange and Brokerage Conference, discussed the increased prevalence of algorithmic trading and the regulatory and enforcement challenges it presents. Massad noted that algorithmic trading complicates CFTC surveillance of trading activity by increasing the amount of data that must be analyzed; additionally, algorithmic trading has led to increased enforcement scrutiny including several recent spoofing cases. Massad indicated that the CFTC is considering new policy surrounding algorithmic trading, including registration requirements for traders involved in algorithmic trading, pre­trade controls, and standards on the development and monitoring of algorithmic trading systems. Massad Remarks.

Trade Options Proposed Rule Extended

On June 2nd, the CFTC extended the comment period for the Trade Options Proposal until June 22, 2015. 80 FR 31326.

Federal Rules Effective Dates

June 2015 ­ August 2015

Commodity Futures Trading Commission

July 10, 2015                  Proceedings Before the Commodity Futures Trading Commission; Rules Relating to Suspension or Disbarment From Appearance and Practice.  80 FR 32855.

Consumer Finance Protection Board

August 10, 2015           Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

August 1, 2015            Amendments to the 2013 Integrated Mortgage Disclosures Rule Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) and the 2013 Loan Originator Rule Under the Truth in

                                        Lending Act (Regulation Z).  80 FR 8767.

Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z). 78 FR 80227.

Federal Deposit Insurance Corporation

August 10, 2015             Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

July 1, 2015                    Restrictions on Sale of Assets of a Failed Institution by the Federal Deposit Insurance Corporation. 80 FR 22886.

Federal Housing Finance Agency

August 10, 2015             Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

July 6, 2015                    Minority and Women Inclusion Amendments. 80 FR 25209.

June 29, 2015                Federal Home Loan Bank Community Support Program ­ Administrative Amendments. 80 FR 30336.

Federal Reserve System

August 10, 2015             Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

National Credit Union Administration

July 6, 2015                    Chartering and Field of Membership Manual.  80 FR 25924.

June 5, 2015                  Corporate Credit Unions.  80 FR 25932.

Office of the Comptroller of the Currency

August 10, 2015             Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

July 1, 2015                    Integration of National Bank and Federal Savings Association Regulations: Licensing Rules. 80 FR 28345.

Securities and Exchange Commission

June 19, 2015                Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A). 80 FR 21805.

June 15, 2015                Nationally Recognized Statistical Rating Organizations. 79 FR 55077.

[This rule is effective November 14, 2014; except the amendments to Sec. 240.17g­3(a) (7) and (b)(2) and Form NRSRO, which are effective on January 1, 2015; and the amendments to Sec. 240.17g­2(a)(9), (b)(13) through (15), Sec. 240.17g­5(a)(3)(iii)(E), (c)(6) through (8), Sec. 240.17g­7(a) and (b), and Form ABS­15G, which are effective June 15, 2015. The addition of Sec. Sec. 240.15Ga­2, 240.17g­8, 240.17g­9, 240.17g­ 10, and Form ABS Due Diligence­15E are effective June 15, 2015.]

Exchanges and Self­Regulatory Organizations

Chicago Board Options Exchange

CBOE Proposes Rule Change to Volatility Index Options

On June 8th, the SEC published the Chicago Board Options Exchange (“CBOE”) proposed rule change to expire CBOE Volatility Index options every week. Comments should be submitted on or before 21 days from publication in the Federal Register which is expected shortly. SEC Release 34­75120.

ICE Clear

ICC Risk Management Framework Rule Change Proposed

On June 8th, the SEC published ICE Clear Credit LLC’s proposed rule change to revise the ICC Risk Management Framework to incorporate certain risk model enhancements to the General Wrong Way Risk methodology. Comments should be submitted on or before 21 days from publication in the Federal Register which is expected shortly. SEC Release 34­75119.


NYSE Proposes to Make Pilot Programs Permanent

On June 11th, the SEC released a notice seeking comment on an NYSE proposal to make permanent the rules of the New Market Model Pilot (“NMM Pilot”) and the Supplemental Liquidity Providers Pilot (“SLP Pilot”). Among other things, the NMM Pilot rules created the market participant category of Designated Market Maker and eliminated the function of NYSE specialists. The SLP Pilot created the market participant category of Supplemental Liquidity Providers, who supplement the liquidity provided by the Designated Market Makers. Comments are due within 21 days after publication of the notice in the Federal Register. SEC Notice and Pilot Rules.

NYSE Submits Amendment to Managed Fund Shares Proposal

On June 5th, the SEC published NYSE’s proposed amendment to NYSE Arca Equities Rule 8.600 to adopt generic listing standards for managed fund shares. Comments should be submitted by July 2, 2015 and rebuttal comments by July 16, 2015. SEC Release 34­75115.

SEC Approves Rule Change to Amend Operating Agreement

On June 4th, the SEC approved an NYSE proposed rule to amend the Seventh Amended and Restated Operating Agreement that would remove the requirement that the independent directors that make up the majority of the board of directors of the NYSE also serve as directors of the Intercontinental Exchange (“ICE”). SEC Release 34­75105.

Proposed Rule Change to COA

On June 2nd, the SEC provided notice of NYSE Arca’s and NYSEMKT’s proposed rule to change the Electronic Complex Order Auction (“COA”) process by removing the limitation on who can respond to a COA and providing a response time interval of at least 500 milliseconds. Comments should be submitted on or before June 29,  2015. SEC Release 34­75096; SEC Release 34­75095.

International Securities Exchange

ISE Opening Process Proposed Rule Comment Period Extended

On June 4th, the SEC published a notice extending to August 7, 2015, the comment period on the International Securities Exchange’s (“ISE”) proposed rule to modify the opening process. SEC Release 34­75104.

The Depository Trust Company

DTC Proposes to Discontinue Distribution of Fractional Shares

On June 2nd, the SEC published The Depository Trust Company’s (“DTC”) proposed rule change regarding the discontinuance of the distribution of fractional shares of securities in DTC’s system, when DTC is handling fractional dispositions of shares resulting from corporate actions for new issues. Fractional shares could either be rounded up or dropped, or issues could submit payment of cash­in­lieu of fractional shares. Comments should be submitted on or before June 29, 2015. SEC Release 34­75094.

Financial Industry Regulatory Agency

FINRA Proposes Web­based Continuing Education

On June 11th, the SEC released a notice seeking comment on a FINRA proposal to amend FINRA Rule 1250. The amendment would allow registered persons to complete the Regulatory Element of FINRA’s Continuing Education requirements through Web­based programs. The current test­center delivery system would be phased out over time, with the first Web­based programs planned for October 2015. Comments on the proposal are due within 45 days after publication of the notice in the Federal Register. Continuing Education.

FINRA Dark Pool Fees May Be Reduced

On June 10th, Richard Ketchum, chief executive officer of FINRA, said in order to make the information more accessible, FINRA is considering reducing or eliminating fees it charges professional users for its alternative trading systems (ATSs) weekly report; most of the ATSs featured in the report are “dark pools.” Currently, non­ professional users can access FINRA’s data for free, but professionals and vendors must pay a fee and cannot distribute the data to third parties. Dark Pools.

FINRA Outlines Top Regulatory Priorities

On June 3rd, Forbes outlined FINRA’s top ten regulatory priorities for the financial services industry from the 2015 FINRA Annual Conference held on May 27­29 in Washington, DC. They include senior investors; cybersecurity; creating a culture of compliance; best interest standards; and conflicts of interest. Conference.

FINRA Talks Cybersecurity at SIFMA

On June 2nd, Law360 reported on a speech by FINRA’s Daniel Sibears at a SIFMA event, where he talked about what firms should do to make sure their security systems are secure, and specifically what they should do if they discover a security breach. Cybersecurity.


On June 1st, FINRA announced that Trade Reporting and Compliance Engine (“TRACE”) will bring greater transparency to the asset­backed securities market including 144A securities transactions, providing post­trade price information including those backed by auto loans, credit card receivables and student loans. TRACE will provide CUSIP, time of the trade, price and volume no later than 45 minutes after the trade is executed and, after December 4, 2015, no later than 15 minutes after the trade is executed. FINRA Press Release. See also

FINRA Launches Ads on BrokerCheck

On June 1st, FINRA announced the promotion of BrokerCheck in a national ad campaign which will run on cable channels, online news sources, search engines, as well as in print news sources. The intent of the humorous ads is to demonstrate that it is important for investors to investigate the broker with whom they are investing their money. FINRA Press Release. See also Reuters.

International Swaps and Derivatives Association

ISDA Launches Licensing Program for SIMM

On June 1st, the International Swaps and Derivatives Association (“ISDA”) announced the launch of a licensing program for their Standard Initial Margin Model (“SIMM”) which will provide a single model that meets regulatory standards. Using a single standard to calculate initial margin could reduce the potential for disputes among licensed counterparties and permit timely and transparent dispute resolution. ISDA Press Release.

Judicial Developments

Constitutional Claims in Insider Trading Action Are Outside SEC's Expertise

Charles L. Hill, Jr., a real estate developer who is not registered with the SEC, filed an action in the U.S. District Court for the Northern District of Georgia to declare an SEC administrative proceeding against him unconstitutional. The SEC alleged that Hill was liable for insider trading in violation of the Exchange Act when he bought and then sold a large quantity of Radiant Systems Inc. stock after receiving inside information about a future merger with Radiant. Hill argued that the SEC had no direct evidence of insider trading and that it merely relied on speculation. Hill later contended that the SEC Administrative Law Judge’s (“ALJ”) appointment to the related administrative proceeding, in which he asserted three constitutional arguments, violated the U.S. Constitution's Appointments Clause, as the ALJ is an “inferior officer” who was not appointed by the President,   the courts of law, or a department head. The SEC claimed that Hill's challenges do, in fact, “fall within the Commission's expertise.” On June 8th, the district court held that Hill's constitutional claims are outside the SEC's expertise, finding that he has proven a substantial likelihood of success on the merits of his claim that the SEC violated the Appointments Clause. The court preliminarily enjoined the SEC from conducting the administrative proceeding and scheduled hearing, giving the court time to consider the action on the merits. Charles L. Hill, Jr. vs. Securities and Exchange Commission. See also this discussion in Forbes. In a related action, an SEC judge on June 9th denied an unusual request from the agency to submit an affidavit on whether he has ever felt pressure to favor the SEC in his rulings. The SEC’s apparently first­of­its­kind request arose following recent criticism of the agency over its increasing use of in­house judges, including the large amount of legal challenges from defendants seeking to fight their cases against the SEC in federal court. Wall Street Journal.

Industry News

Swap Rate’s Cost Raising Concerns

On June 11th, Reuters reported that concerns are being raised regarding the impact of the FRB’s planned interest rate hike on the interest rate swaps market. The gap in costs to hedge interest rate risk between clearing houses such as LCH.Clearnet and the smaller Chicago Mercantile Exchange has already caused losses to Wall Street dealers. Swap Rate.

No Agreement by Global Regulators on Who Pays for Failed Clearing Houses

On June 10th, Reuters reported that global regulators have not agreed on who would pay for a failed clearing house for derivatives. The European Commission is currently drafting an EU law on how to deal with failing clearers. Central banks’ blanket guarantees could enable clearing houses to take less care about mitigating risks so the policy must clearly state under what circumstances a central bank would stand behind a clearing house. Clearing Houses.

EDGAR Fix Suggestions after Avon

On June 9th, Compliance Week published various suggestions and comments on how to update EDGAR Filings after the manipulation of Avon filings. The suggestions range from ways to make it easier to search to adopting consistent data fields and formats. EDGAR.

Leverage Ratio Affects Derivatives Market

On June 9th, Reuters reported that financial market regulators are concerned that the derivatives market will be affected by the new leverage ratio rule, which specifies the minimum amount of core capital a bank must hold as a proportion of its total assets. The ratio also includes the collateral banks must hold on behalf of clients to meet clearing house requirements; as a result, banks are avoiding placing derivatives trades through clearing houses. Leverage Ratio.

SIFMA Proposes Best Interests Standards for Broker­Dealers

On June 3rd, Securities Industry and Financial Markets Association (“SIFMA”) president and CEO Kenneth E. Bentsen, Jr. in a speech at SIFMA’s DOL (“Department of Labor”) Fiduciary Seminar revealed SIFMA’s best interests standard for broker­dealers which he says should apply across all individual retail investments not just to IRA accounts as in the DOL’s fiduciary rule proposal. SIFMA Press Release. See also Think Advisor.

States Pass Crowdfunding Laws and Rules

On June 3rd, DealBook reported that 22 states and the District of Columba, frustrated with federal regulators’ delay, have passed equity crowdfunding laws and regulations. Three more states are expecting their respective governors’ signatures and 11 additional states are in the consideration phase of adopting these laws and procedures. The state­level rules have heavy restrictions, which include the amount of money that can be raised as well as the fact that companies can raise money only from investors in their own states. Crowdfunding.

Analysts’ Financial Predictions Still Inaccurate

On June 2nd, Bloomberg reported on a study to be published in the CFA Institute’s Financial Analysts Journal on the accuracy of financial analysts’ profit predictions. The study found that since the 2002 Sarbanes­Oxley Act, which was supposed to increase transparency, the accuracy of financial predictions has actually declined. The reason could be two­fold: lower availability and reliability of company financial information and analysts have reduced their efforts and forecasts have suffered. Financial Predictions.

Capital Risk Models Concern Joint Forum

On June 2nd, Reuters reported that the Joint Forum, comprised of the Basel Committee, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors, said in a statement that “supervisors should be cautious against over­reliance on internal models for credit risk management and regulatory capital” as they believe banks have been understating risks and found huge variations in calculations of their capital adequacy ratios. As banks may be taking on too much risk at a time of low interest rates, supervisors should scrutinize the banks’ risk­taking. Capital Risk.

Senator Warren Criticizes SEC’s White

On June 2nd, Reuters reported that Democratic U.S. Senator Elizabeth Warren criticized SEC Chair Mary Jo White in a letter referencing inadequate enforcement, concerns about granting regulatory waivers to big banks that break the law, and executive pay rule delays. In her response, Chair White noted that Senator Warren’s mischaracterization of her and the SEC’s accomplishments “will not detract from the work we have done, and will continue to do, on behalf of investors.” Warren Criticism.

Large Financial Sector Size Inhibiting Growth

On May 31st, Steve Denning in Forbes wrote that the financial sector is costing the U.S. 2% of GDP annually. According to a 2012 International Monetary Fund report if the private­sector credit reaches 80% to 100% of GDP, it inhibits growth and increases volatility. Private­sector credit in the U.S. in 2012 was 184% of GDP. According to the study, if the U.S. financial sector were the proper size, economic recovery would be 3% to 4% per year rather than the 1% to 2% it has been over the past few years. He also noted that the large size of the financial sector gives it too much power and influence and that the banks look at the fines as a cost of doing business, and they do little to deter their activities. He argues that the consequences of committing criminal acts should be that   banks be barred from fiduciary activities such as managing pension funds. Too Big.