Insights from Winston & Strawn

FinCEN’s Proposal of Anti-Money Laundering Regulations for Investment Advisers As predicted in last week’s Financial Services newsletter, on August 25th, the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a proposed rule titled Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers. The proposed rule is an effort to address money laundering vulnerabilities in the U.S. Financial system.  The rule would apply to those advisers who are registered with the U.S. Securities and Exchange Commission (“SEC”). We have a detailed client briefing on the Proposed Rule that can be viewed here.

SEC Increasingly Relying on Administrative Proceedings for Enforcement Actions Over Court Proceedings The SEC has, over the last few years, increased the use of administrative hearings as opposed to court proceedings for enforcement actions by 40%. For obvious reasons, administrative proceedings conducted by the same organization that is bringing an enforcement action are seen by many in the financial services industry as inherently biased. The SEC has been able to expand the breadth of its administrative proceedings over time with the ever growing statutory authority provided by legislation such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010.

As pointed out by Henry Engler in his Reuters article on this subject “‘there is limited or no discovery, no right to a jury, and a more difficult path to appeal.’”  Engler Article. Particularly disturbing is the disparity in outcomes between these two avenues.  As Judge Jed S. Rakoff pointed out in a speech given in November of last year, the SEC enjoyed an unblemished 100% success rate in administrative proceedings brought during fiscal year 2014, while barely  managing more than a 60% rate when forced to bring actions to trial. Rakoff PLI Speech

This “administrative creep”—as Judge Rakoff characterized it—may be even more troubling given that an appellate court, the Seventh Circuit Court of Appeals, just last week affirmed a lower court’s dismissal of a case brought against the SEC which challenged the authority of the SEC to conduct an enforcement proceeding “in-house” as unconstitutional. The Seventh Circuit agreed with the district court that the administrative review scheme established by Congress stripped it of jurisdiction to hear this type of challenge. Additionally, the Seventh Circuit stated that the appropriate time to hear such a challenge was at the conclusion of the case after the SEC renders an adverse final decision. Bebo v SEC.

Sterling Sears

Banking Agency Developments

OCC Hosting NY Workshop for Bank Directors

On August 25th, the Office of the Comptroller of the Currency (“OCC”) announced that it will host a workshop in New York City, from September 28th through September 30th, for directors of national community banks and federal savings associations. The “Building Block for Directors” Workshop will introduce new bank directors to the agency’s approach to supervision and provides experienced bank directors with a timely review of core concepts. New York Workshop.

Federal Financial Institutions Regulatory Agencies Announce Availability of Data on Small Business, Small Farm, and Community Development Lending

On August 25th, the three federal banking agency members of the Federal Financial Institutions Examination Council (“FFIEC”) with Community Reinvestment Act (“CRA”) responsibilities (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) announced in a joint release the availability of data on small business, small farm, and community development lending reported by certain commercial banks and savings associations, pursuant to the CRA.Data.

FDIC Releases its Summer 2015 Issue of Supervisory Insights

On August 24th, the Federal Deposit Insurance Corporation (“FDIC”) released the summer 2015 issue of Supervisory Insights, with a lead article that focuses on the importance of utilizing corporate governance and strategic planning in response to earnings challenges. The summer issue also has an article that summarizes the regulatory landscape applicable to Bank investment in securitizations, including an explanation of “how an investment decision process can be structured to help a bank remain compliant with these new requirements.” Supervisory Insights.

OCC Will Be Hosting Risk Governance and Compliance Workshops

On August 21st, the OCC announced that it will be hosting two workshops in Albuquerque, N.M. for directors of national community banks and federal savings associations. The Risk Governance workshop will be held on September 29th and the Compliance Risk workshop will be held on September 30th. New Mexico Workshops.

Treasury Department Developments

CFPB Monthly Consumer Complaints Snapshot

On August 25th, the Consumer Financial Protection Bureau (“CFPB”) released its monthly consumer complaints snapshot in which it spotlights credit reporting complaints, which are on the rise. This month’s snapshot also highlights trends seen in complaints coming from the Los Angeles, CA metro area. Snapshot.

Securities and Exchange Commission


Revised Financial Reporting Manual

On August 25th, the SEC’s Division of Corporation Finance released an updated Financial Reporting Manual. The updated manual includes revisions to the Division’s guidance for delinquent filers. Financial Reporting Manual.

OCIE Issues Risk Alert Regarding Deficiencies in SSPs Controls

On August 24th, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert based on deficiencies related to the sales of structured securities products (“SSPs”) identified by its National Examination Program staff during examinations of ten branch offices of registered broker-dealers. The National Examination Program staff found that the broker-dealers lacked adequate controls related to determining the suitability of SSP recommendations and failed to conduct compliance and supervisory reviews of their registered representatives’ determinations of customer suitability in SSPs. OCIE Risk Alert.

Speeches and Statements

Aguilar Suggests Reforms to Waiver Process

On August 27th, SEC Commissioner Luis Aguilar issued a statement in which he called for the SEC to adopt a more transparent, flexible, and calibrated approach to its process for granting requests for waivers from regulatory disqualifications. Aguilar noted that the current waiver process results in a lack of substantial information available to the Commissioners and the public because most waiver requests are handled by SEC staff pursuant to delegated authority and are tracked informally unless the request is granted.  Aguilar recommended that SEC staff prepare periodic reports detailing relevant information regarding all waiver requests processed and the SEC create a public website to track the progress and resolution of all waiver requests. Aguilar also called for the greater use of conditional waivers by the SEC to address instances where the outright granting or denial of a waiver request is not warranted. Aguilar Statement.

Other Developments

SEC Submits Amicus Curiae Brief in Facebook IPO Suit

On August 27th, the SEC released an amicus curiae brief it submitted to the U.S. Court of Appeals for the Second Circuit in Lowinger v. Morgan Stanley, a lawsuit in which the plaintiffs are seeking to establish the defendants, the lead underwriters of Facebook’s initial public offering (“IPO”), as beneficial owners forming a “group” with certain Facebook shareholders under a lock-up agreement and thus liable under Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) for short-swing profits they allegedly received in connection with the offering.  In the brief, the SEC explained that, by itself, a typical lock-up agreement executed as part of an IPO is not sufficient to establish a group for the purposes of Sections 13(d) and 16 (b) of the Exchange Act. The SEC further explained that an underwriter is exempt from Section 16 liability as long as its purchases and sales are made in connection with the underwriter’s participation in a bona fide public offering. SEC Amicus Curiae Brief.

SEC Asks Appellate Court to Defer to Its Interpretation of Whistleblower Protections

On August 26th, the SEC published an amicus curiae brief it filed on August 19, 2015, in Vincent Beacom v. Oracle America, Inc., a case before the U.S. Court of Appeals for the Eighth Circuit.  The SEC requested judicial deference to its interpretation of the whistleblower employment anti-retaliation provisions in Section 21F(h)(1) of the Exchange Act as set out in SEC Rule 21F-2(b)(1), which extends the anti-retaliation protection provisions to whistleblowers who report violations of securities laws internally without making a separate report to the SEC. The SEC argued that its interpretation of the Exchange Act’s whistleblowers anti-retaliation provisions is a reasonable construction of ambiguous statutory language and it advances important policy objectives by encouraging internal reporting of potential wrongdoing. SEC Amicus Curiae Brief.

Securities Registration Fee Rates

On August 26th, the SEC issued an order adjusting the fee rates it charges for the registration of securities for fiscal year 2016 to $100.70 per million. The new fee rate is effective October 1, 2015. SEC Release No. 33-9898.

Money Market Fund Statistics

On August 21st, the SEC’s Division of Investment Management released its report of money market fund statistics as of July 31, 2015.

Commodity Futures Trading Commission

CFTC Approves National Futures Association Rules For Forex Dealers

On August 27th, the U.S. Commodity Futures Trading Commission (“CFTC”) approved rule amendments and a new interpretive notice filed by the National Futures Association (“NFA”) applicable to NFA Member Forex Dealers.  The Rules are designed to enhance protections for retail forex customers. NFA.

CFTC Issues Orders of Registration to ICE Futures Canada Inc

On August 26th, the U.S. CFTC  announced that it has issued Orders of Registration to ICE Futures Canada, Inc. (“ICEFC”), a Foreign Board of Trade located in Winnipeg, Manitoba, Canada, and Montréal Exchange Inc. (“MX”), a Foreign Board of Trade located in Montréal, Québec, Canada. Under their respective orders, ICEFC and MX can provide their identified members or other participants located in the U.S. with direct access to their electronic order entry and trade matching system. Orders of Registration.

Alcoa Inc. Is Set to Meet CFTC to Challenge LME Warehouse Reform

On August 25th, Reuters reported that Alcoa Inc. will challenge the chairman of the CFTC on its authority to interfere in the London Metal Exchange’s (“LME”) warehousing reform. Alcoa.

Federal Rules Effective Dates

August 2015 - October 2015

Consumer Financial Protection Bureau

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Federal Deposit Insurance Corporation

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Federal Housing Finance Agency

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Federal Reserve System

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Financial Crimes Enforcement Network

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National Credit Union Administration

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Office of the Comptroller of the Currency

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Securities and Exchange Commission

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Exchanges and Self-Regulatory Organizations

BOX Options Exchange LLC

SEC Approves BOX Options Rule Changes to Governance Provisions of Equity Rights Program

On August 27th, the SEC approved BOX Options Exchange LLC’s proposed rule changes implementing the governance provisions of a volume performance rights program, which will allow Box Options Participants in the program to acquire equity in, and receive distributions from, an affiliate of BOX Options Exchange LLC in exchange for a token cash payment and the achievement of certain order flow volume commitments over a five year period. SEC Release No. 34-75766.

CBOE Futures Exchange LLC

CFE Proposes Amendments to Reportable Position and Ownership and Control Reporting Rules

On August 21st, the SEC requested comment on CBOE Futures Exchange LLC’s (“CFE”) proposed rule change, which would amend CFE rules to clarify the application of CFE requirements relating to reportable positions and ownership and control reports, specifically to security futures traded on CFE. Comments should be submitted on or before September 17, 2015. SEC Release No. 34-75748.

Chicago Mercantile Exchange Inc.

CME Requests Withdrawal of Clearing Agency Registration

On August 26th, the SEC announced that the Chicago Mercantile Exchange, Inc. (“CME”) filed a request to withdraw its registration as a clearing agency for security-based swaps under Section 17A of the Exchange Act. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 31, 2015. SEC Release No. 3475762.

Financial Industry Regulatory Authority

FINRA Adopts Equity Research Reports Rule

On August 26th, the Financial Industry Regulatory Authority (“FINRA”) announced that the SEC approved its consolidated rule addressing conflicts of interest relating to the publication and distribution of equity research reports. The provisions of the new rule governing the registration of research analysts, quiet periods, exemptions for good cause, divesting research analyst holdings, and annual attestation requirements will become effective on September 25, 2015. The remaining provisions will become effective on December 24, 2015. FINRA Regulatory Notice 15-30.

FINRA Adopts New Rule Addressing Conflicts of Interest in Debt Research Reports

On August 26th, FINRA gave notice that the SEC has approved its adoption of FINRA Rule 2242 – Debt Research Analysts and Debt Research Reports – which addresses conflicts of interest in the publication and distribution of debt research reports. The new rule extends the protections granted to recipients of equity research to retail debt research recipients while accounting for the differences in the trading of debt securities. The new rule will become effective February 22, 2016. FINRA Regulatory Notice 15-31. 

International Swaps and Derivatives Association

ISDA Publishes Second Quarter Review of IRD and CDS Trading Activity

On August 24th, the International Swaps and Derivatives Association (“ISDA”) released the SwapsInfo Second Quarter 2015 Review, which analyzes trading activity of interest rate derivatives (“IRD”) and credit default swaps (“CDS”) to assess the impact of regulatory change on electronic and bilateral trading volumes, in addition to cleared and non-cleared activity.  ISDA Review.

National Securities Clearing Corporation

NSCC Proposes Changes to Its Margining Methodology for Family-Issued Securities by Watch List Members

On August 27th, the SEC published a notice to solicit comments on the National Securities Clearing Corporation’s (“NSCC”) proposed rule amendments, which would enhance the NSCC’s margining methodology as applied to family-issued securities of NSCC members who, because they present a heightened credit risk or have a higher risk in their ability to meet settlement, are placed on the NSCC’s “Watch List.” Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 31, 2015. SEC Release No. 34-75768.

Judicial Developments

CEO’s Intent to Defraud Can Be Imputed to the Company

On August 28th, the Second Circuit vacated the district court’s dismissal of Section 10(b) and Rule 10b-5 claims against China North East Petroleum Holdings Ltd., and Wang Hong Jun, its former CEO, who signed all relevant SEC filings attesting to the company’s internal controls while allegedly simultaneously looting its treasury and engaging in unauthorized transfers of company funds. The Second Circuit held that plaintiff sufficiently pleaded Wang’s intent with allegations of his motive and opportunity to commit fraud. The Second Circuit also found these allegations to support the claim against China North, as Wang’s intent can be imputed to the company. Wang.

Former CEO’s Solicitations to Shareholders Are Exempt from Registration With the SEC

On August 27th, the Sixth Circuit issued its decision in an action brought by Gas Natural Inc. to enjoin its former CEO, chairperson and board member Richard M. Osborne from soliciting its shareholders without registering the letters as solicitations with the SEC. The district court enjoined Osborne from sending additional letters without registering them. The Sixth Circuit vacated the injunction and remanded, holding that the solicitations are exempt from registration requirements since Osborne effectively requested shareholders not execute proxies, did not request authority to act as proxy for another shareholder, and did not send a proxy form to shareholders.Osborne.

Challenge to Four-Year-Old ‘Pay to Play’ Rule That Regulates Investment Advisers’ Campaign Contributions Is Time-Barred

On August 25th, the D.C. Circuit affirmed dismissal of a suit brought by the New York Republican State Committee and the Tennessee Republican Party against the SEC in which they sought to invalidate a four-year-old rule, promulgated under the Investment Advisers Act of 1940, which regulates campaign contributions made by investment advisers. Under the Act, when an adviser wants to contribute to an official who can influence the adviser’s hiring by a government client, the adviser has to wait two years before it can work for that client. The D.C. Circuit noted that appeals courts have exclusive jurisdiction to hear challenges to rules under the Act and added that such challenges must be brought within 60 days of the rule’s promulgation. Campaign Contributions.

Federal Trade Commission Has the Authority to Regulate Cybersecurity

On August 24th, the Third Circuit affirmed denial of Wyndham Worldwide Corporation’s (and addiliated entities’ (collecetively “Wyndham”)) motion to dismiss a case brought against it after hackers accessed Wyndham’s computer systems and stole personal and financial information for thousands of consumers, leading to over $10.6 million in fraudulent charges. The Federal Trade Commission (“FTC”) alleged that Wyndham’s conduct was an unfair practice and that its privacy policy was deceptive. The Third Circuit held that the FTC has authority to regulate cybersecurity under the unfairness prong of the Federal Trade Commission Act and that Wyndham had fair notice that its cybersecurity practices could fall short of that provision. Cybersecurity.

Shareholder Cannot Bring Derivative Action After Company Already Declined to Do So in Valid Exercise of Business Judgment

On August 21st, the Eighth Circuit affirmed the district court’s granting of summary judgment to defendants in an action in which the shareholder of a mutual fund offered by a Maryland company sought to bring a derivative action to enforce the company's alleged rights. The company refused her demand for the action and she sued. The district court found the shareholder could not sue where the company had declined to do so in a valid exercise of business judgment. The Eighth Circuit added that the special litigation committee members who recommended denial of the demand, and who were chosen by the company's directors, were sufficiently independent from those directors. Seidl.

Investment Bank That Did Not Enable Investments Cannot Sue Former Client for Placement Fee

On August 21st, the Third Circuit affirmed a district court’s holding that investment bank Cato Capital LLC (“Cato”) had not satisfied a condition precedent to payment under a contract. Cato had sued biopharmaceutical company and former client Hemispherx Biopharma Inc. (“Hemispherx”) to recover a placement fee after several companies invested millions of dollars in Hemispherx, even though Cato did not facilitate those investments and those transactions closed after Cato’s relationship with Hemispherx had ended. The Third Circuit also found that Cato was not entitled to payment under the contract because Cato did not cause the investments. Cato.

Court Unlocks Short-Swing Profit Blocker Provision

On August 20th, the U.S. District Court for the Southern District of New York denied a motion to dismiss a shareholder derivative suit alleging violations of Section 16(b) of the Exchange Act. Plaintiff Andrew Roth, a shareholder of YRC Worldwide Inc., sought the disgorgement of short-swing profits by Solus Alternative Asset Management LP and its related entities (collectively, “Solus”). The court found that although Solus had executed a “blocker provision” in an effort to avoid short-swing profit liability, Solus was already an insider with the right to convert notes into stock when it signed the blocker provision. The court added that, even if Solus intended to waive its conversion rights, the provision may not have effectively divested Solus of beneficial ownership. Finally, the court noted that when an investor uses a contract to divest himself of beneficial ownership as part of a plan to evade beneficial ownership reporting requirements, the investor is deemed to own the securities he seeks to divest. Solus.

Industry News

Dole CEO and Aide Liable for $148 Million in Buyout

On August 27th, The New York Times reported on a Delaware Court of Chancery ruling that David H. Murdock, Dole’s chairman, and C. Michael Carter, its former COO, must reimburse other shareholders $148 million for fraudulently driving down Dole’s stock price so they could buy the business at a cheaper price in its 2013 leveraged buyout. Dole.

U.S. Labor Department Is Leaning Against Regulatory Relief for Banks in LIBOR Scandal

On August 27th, Reuters reported that the U.S. Labor Department is leaning toward denying requests for regulatory relief by three large foreign banks that pleaded guilty to manipulating LIBOR interest rates but want to keep managing retirement accounts for clients. Regulatory Relief.

BlackRock Acquiring Robo-Advisor

On August 26th, Reuters reported that asset manager BlackRock Inc. is acquiring robo-adviser FutureAdvisor, which offers online portfolio management. Instead of targeting individual investors, BlackRock intends to utilize FutureAdvisor in order to enable banks, brokerage firms, insurers, and 401(k) plans to use the company’s digital platform to serve “mass affluent” investors and millennials. BlackRock.

Apple CEO May Have Violated SEC Rules

On August 24th, MarketWatch reported that Apple CEO Tim Cook’s decision to give a mid–quarter update on Apple’s performance in a private email to CNBC’s Jim Cramer may have violated the SEC’s Fair Disclosure regulation. Apple.

New Way of Charging Insider Trading

On August 24th, DealBook reported on the new way of charging those who receive tips that could circumvent requirements otherwise necessary to prove insider trading. While most insider trading cases are charged as a violation of Section 10(b) of the Exchange Act, some federal prosecutors are charging recipients of tips with violating another securities fraud statute, 18 USC Sec. 1348, which is part of the Sarbanes–Oxley Act and which does not directly address insider trading. The SEC would not be able to use this new approach, as it can only pursue insider trading cases under the federal securities law, not a criminal statute. DealBook.

Former SEC Chairman Levitt Comments on DOL Fiduciary Rule

On August 21st, ThinkAdvisor reported that former SEC Chairman Arthur Levitt said in an interview with the Investment Adviser Association that, because the SEC has become “locked” and “divided philosophically” on whether to move forward on a fiduciary duty rule, the industry should instead defer to the Department of Labor’s (“DOL”) proposal. Fiduciary Rule.

Goldman Sachs Reacts to New Money Market Funds Rules

On August 21st, Reuters reported that Goldman Sachs Group Inc. and other asset management firms are bracing for the inevitable high demand for U.S. government money market funds that will come as a result of new rules that are meant to protect investors from high market stress. Money Market Funds.