Insights from Winston & Strawn

On May 19, 2015, the SEC proposed various amendments to Form ADV that are intended to collect more information from investment advisers about their separately managed accounts and the nature of assets held in them, as well as investment advisers’ social media activities (a more detailed description of the proposed amendments can be found here).

The comment period for the proposed amendments ended on August 11. While final SEC action on the proposed amendments is not expected imminently, Institutional Investor wrote on Wednesday, September 9 that investment advisers and their Chief Compliance Officers may be well advised to use this time prior to SEC final action to begin considering what changes may be necessary in their internal systems and data collection procedures in order to comply with the anticipated changes to Form ADV.

The article states that CCOs generally have not yet begun to treat this with a great deal of urgency, but it also notes that the proposed amendments can serve as a good indicator of specific data the SEC desires to collect, such as securities-level detail with respect to separately managed accounts. Because many investment advisers’ systems and procedures may not currently be designed to collect this information in an efficient manner, it may behoove advisers to devote some time and resources now, prior to a final release and adoption of rules, to consider how their systems and procedures can be revised to do so.

Winston & Strawn will continue to monitor developments related to the SEC’s proposed amendments to the Form ADV.

Feature: The U.K.’s New Accountability Regime Extends to Insurance and Foreign Financial Firms

Last month, the U.K. Financial Conduct Authority (“FCA”), in conjunction with the Prudential Regulatory Authority (“PRA”), finalized rules surrounding the application of its new accountability regime to senior managers and other individuals employed by financial firms operating in the U.K. The package of rules and policies issued by the agencies represents the culmination of efforts by regulators to clarify and solidify standards of responsibility for individuals working in the financial industry in the U.K.

The FCA issued two sets of final rules related to the new accountability regime. FS15/3 Strengthening accountability in banking: UK branches of foreign bank—Feedback on FCA CP15/10 sets out near-final rules that apply the accountability regime to individuals working in U.K. branches of overseas banks. The FCA’s rules requires senior managers of U.K. branches of foreign banks to be subject to regulatory approval and a clearly allocated set of responsibilities, as well as to ongoing assessment of their fitness by their firms. Additionally, these institutions will be required to certify the fitness of all of their employees under the regime. The rules tailor the regime to the differences between incoming branches and U.K. relevant firms. FCA FS15/3.

The FCA also published its final rules for the approved persons regime for individuals employed by insurance firms subject to Solvency II. Solvency II is the regulatory framework for insurance firms in the European Union, which became effective earlier this year. The Solvency II regime established a more risk-sensitive prudential framework based on the risk profiles of individual insurance companies and sets out requirements surrounding risk management, transparency, and capital requirements. European Commission Press Release. The FCA’s final rules for Solvency II firms include changes to the scope of the approved persons regime, changes to the assessment of candidates for Significant Influence Function roles to reflect Solvency II and European Insurance and Occupational Pensions Authority (“EIOPA”) guidelines, new conduct rules for approved persons in Solvency II firms, and changes to governance arrangements to support the increased accountability requirements of senior staff. FCA PS15/21.

Simultaneously with the release of the FCA’s rules, the PRA published a suite of policy statements detailing how the new accountability regime will apply to various PRA-regulated firms.  In PS20/15 Strengthening individual accountability in banking: UK branches of non‐EEA banks, the PRA issued the final and near-final rules detailing the application of the Senior Mangers Regime (“SMR”), Certification Regime and Conduct Rules to U.K. branches of non-European Economic Area (“EEA”) banks and non-EEA branches of PRA-designated investment firms. The rules will require that individuals located overseas who are directly responsible for implementing a non-EEA bank or firm’s strategy in the firm’s U.K. branch or U.K. subsidiaries obtain PRA approval and will be subject to Conduct Rules for Senior Managers and certain Prescribed Responsibilities for Senior Managers.PRA PS20/15.

The PRA additionally released a second set of final rules to implement the Senior Insurance Managers Regime (“SIMR”) for U.K. insurance firms subject to Solvency II and responded to feedback it received to several related proposals.  Among other things, the new final rules clarify the way in which firms use Conduct Standards to conduct assessments of senior managers and non-executive directors, extend the deadline for firms to prepare scope of responsibility statements for grandfathered individuals, and retain the requirement that firms obtain references from former employers for any individuals seeking PRA approval as a senior manager. PRA PS22/15. In conjunction with this policy statement, the PRA issued a supervisory statement in which it explained its expectations for insurance firms in complying with the SIMR. PRA SS35/15.

Finally, the PRA set out final rules in PS 21/15 The Senior Insurance Managers Regime: a streamlined approach for non‐Solvency II firms, which would replace the current Approved Persons Regime with a streamlined version of the SIMR for smaller insurance firms not subject to Solvency II and non-Directive firms (“NDFs”) with less than £25 million in assets.  Among other things, the final rules require that relevant firms must have at least one senior manager approved by the PRA who is responsible for the conduct of the firm’s regulated activities, firms must conduct assessments to ensure their senior managers behave in a manner that is fit and proper, and firms must create and maintain records of the significant responsibilities allocated to senior managers. PRA PS 21/15. The policy statement also proposes applying an SIMR similar to the regime for Solvency II firms to non-Solvency II firms with more than £25 million in assets.  This proposal is set out in a consultation paper issued concurrently with the policy statement; comments should be submitted on or before October 12, 2015. PRA CP26/15.

While both the PRA and the FCA will continue to seek consultation on additional rule changes, the new accountability regimes will become effective on March 7, 2016.

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

OCC to Host Compliance and Credit Risk Workshops

On September 8th, the Office of the Comptroller of the Currency (“OCC”) announced that it will hold two workshops in Dallas for directors of national community banks and federal savings associations in October. The Compliance Risk workshop will be held on October 20th and will focus on the elements of an effective compliance risk management program. The Credit Risk workshop will be held on October 21st and will focus on credit risk within the loan portfolio. OCC Press Release.

FFIEC Proposes Changes to Call Reports for Community Banks

On September 8th, the Federal Financial Institutions Examination Council (“FFIEC”) approved a proposal by the OCC, the Federal Deposit Insurance Corporation (“FDIC”), and the Federal Reserve Board (“FRB”) to simplify the reporting requirements for community banks by eliminating or revising several Call Report data items. The proposed changes to the Call Report would apply to community banks and savings associations, but not credit unions. Comments should be submitted within 60 days of publication in the Federal Register, which is expected the week of September 14, 2015. FFIEC Press Release.

FDIC Notifies Institutions Regarding Military Lending Act New Requirements

On September 8th, the FDIC issued a Financial Institution Letter explaining the applicability of the Department of Defense’s (“DOD”) final rule amending the implementing regulations of the Military Lending Act of 2006 (“MLA”).  Among other things, the DOD’s final rule defines “consumer credit” consistently with credit that is subject to protection under the Truth-in-Lending Act (“TILA”), extends MLA protections to additional credit products, and provides a safe harbor for creditors in verifying that a consumer is covered by the rule’s protections.  Compliance with the new rule for new covered transactions will begin October 3, 2016. FDIC FIL-37-2015.

Banking Regulators Approve Use of Advanced Approaches Framework by Bank of America

On September 3rd, the FRB and the OCC announced that they have granted approval to Bank of America and its subsidiary national banks to use the “advanced approaches” capital framework beginning in the fourth quarter of 2015. Bank of America and its subsidiaries successfully completed the required trial run of the framework, which requires firms to meet risk-management and risk-management criteria based on standards developed by the Basel Committee on Banking Supervision. Joint Agency Press Release.

FDIC Quarterly Banking Profile

On September 2nd, the FDIC released its Quarterly Banking Profile for the second quarter of 2015. According to the report, FDIC-insured institutions reported aggregate net income of $43 billion during the quarter, which is the highest on record. The report also noted that net operating revenue for banks is 2.1 percent higher than last year, asset quality indicators continued to improve, and net interest margins were still slightly below the average from the same period last year. FDIC Press Release. See also Chair Gruenberg Remarks.

Treasury Department Developments

OFR Publishes Guide to Repo and Securities Lending Market

On September 9th, the Treasury Department’s Office of Financial Research (“OFR”) published a working paper entitled “Reference Guide to U.S. Repo and Securities Lending Markets.” The working paper, which is the first comprehensive reference guide for the U.S. repurchase agreement (“repo”) and securities lending markets, provides an overview of these markets, their vulnerabilities and potential risks, and existing data sources available to regulators to monitor these markets. The paper notes that the data available to regulators and market participants to evaluate risks and market activity remain insufficient and suggests requiring market participants to use legal entity identifiers (“LEIs”) in regulatory reporting to identify counterparties to address data quality issues.OFR Press Release.

Caesars Palace Gambles on AML Compliance, Agrees to Pay $8 Million Penalty

On September 8th, the Financial Crimes Enforcement Network (“FinCEN”) announced it had reached a settlement with Desert Palace, Inc. dba Caesars Palace over violations of the Bank Secrecy Act (“BSA”) stemming from lapses in its anti-money laundering (“AML”) compliance. FinCEN alleged that Caesars Palace failed to monitor its private gaming salons for AML compliance, despite the elevated risk of money laundering violations in the salons, where its wealthy patrons gamble millions of dollars anonymously in unreported transactions. According to the terms of the settlement, Caesars Palace agreed to pay an $8 million civil penalty and adopt measures to improve its AML compliance program, including conducting external audits and independent testing, adopting a rigorous training program, and reporting to the agency regarding the required improvements. FinCEN Press Release.

Securities and Exchange Commission

Proposed Rules

SEC Proposes Amendments That Would Require Access to Data Obtained by Security-Based Swap Data Repositories and Set Forth Exemption from Indemnification Requirement

On September 4th, the SEC proposed amendments to rule 13n-4 under the Securities Exchange Act of 1934 related to regulatory access to security-based swap data held by security-based swap data repositories. The proposed rule amendments would implement the conditional Exchange Act requirement that security-based swap data repositories make data available to certain regulators and other authorities. The proposed rule amendments would also set forth a conditional exemption from the statutory indemnification requirement associated with that regulatory access provision. Comments should be submitted within 45 days of publication in the Federal Register.  SEC Release 34-75845.


Commissioner Stein Speaks Before Institute of Chartered Accountants in England and Wales and BritishAmerican Business

On September 9th, before the Institute of Chartered Accountants in England and Wales and BritishAmerican Business, Commissioner Kara M. Stein examined how, in a time of tremendous technological change, accountants and those who use the same training in other roles can be leaders in moving capital markets and the economy forward.  Stein Remarks.

Other Developments

SEC Names Co-Chiefs of the Division of Enforcement’s Market Abuse Unit

On September 10th, the SEC announced that Robert Cohen and Joseph Sansone have been named co-chiefs of the Division of Enforcement’s Market Abuse Unit, a national specialized unit that focuses on complex insider trading rings and other abusive trading schemes and misconduct. SEC Press Release.

SEC Names New Deputy Director in the Office of Credit Ratings

On September 8th, the SEC announced that Smeeta Ramarathnam has been named Deputy Director in the Office of Credit Ratings, starting later this month. In this new position for the office, Ms. Ramarathnam will provide leadership and direction for activities including examinations and monitoring of nationally recognized statistical rating organizations, rulemaking, and related initiatives. SEC Press Release.

SEC Commissioner Gallagher Has Resigned

On September 4th, SEC Commissioner Daniel M. Gallagher submitted his resignation, effective upon the appointment of his successor or on Friday, October 2, 2015, whichever is earlier. Public Statement.

Commodity Futures Trading Commission

CFTC Approves New Regulation Regarding RFA Membership for Registered Introducing Brokers, Commodity Pool Operators and Commodity Trading Advisors

On September 10th, the Commodity Futures Trading Commission (“CFTC”) approved a final rule that requires all registered introducing brokers and commodity pool operators, as well as certain commodity trading advisors, to obtain and retain membership in a registered futures association (“RFA”). The new rule will become effective 60 days after publication in the Federal Register. Compliance with the new rule will be required by December 31, 2015. CFTC Press Release.

CFTC Grants Temporary SEF Registration to LedgerX LLC

On September 10th, the CFTC announced that it had approved LedgerX LLC’s application for temporary registration as a swap execution facility (“SEF”). The agency indicated that it will review LedgerX’s application to determine whether it fully complies with the requirements of the Commodity Exchange Act and other CFTC regulations governing SEFs. CFTC Letter 15-49.

CFTC Publishes RED List of Unregistered Foreign Entities

On September 9th, the CFTC announced the launch of the Registration Deficient (“RED”) list, which allows investors to identify unregistered foreign entities the CFTC has identified as illegally soliciting U.S. customers to trade in foreign currency or binary options. CFTC Press Release.

CFTC Proposes Amendments to Swap Data Recordkeeping and Reporting Rules for Cleared Swaps

On August 31st, the CFTC proposed amendments to rules relating to swap data reporting for swap data repositories (‘‘SDRs’’), derivatives clearing organizations (‘‘DCOs’’), designated contract markets (‘‘DCMs’’), swap execution facilities (‘‘SEFs’’), swap dealers (‘‘SDs’’), major swap participants (‘‘MSPs’’), and swap counterparties who are neither SDs nor MSPs.  Comments should be submitted on or before October 30, 2015.Notice of Proposed Rulemaking.

Federal Rules Effective Dates

September 2015 - November 2015

Consumer Financial Protection Board

Click here to view table.

Exchanges and Self-Regulatory Organizations


FINRA Publishes Notice to Provide Guidance on Filing Requirements and Regulation A Offerings

On September 8th, the Financial Industry Regulatory Authority (“FINRA”) published a notice to provide guidance regarding the FINRA filing requirements and review procedures that apply to firms that participate in Regulation A+ offerings. FINRA Regulatory Notice 15-32.


SEC Approves Proposed Change to Make Revisions to ICC Risk Management Framework

On September 10th, the SEC approved ICE Clear Credit LLC’s (“ICC”) proposed rule change to revise the ICC Risk Management Framework. The SEC found that the proposal is designed to promote the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts and transactions cleared by ICC and, in general, to protect investors and the public interest. SEC Release No. 34-75887.

SEC Designates Longer Period by Which it Should Decide on Proposed Rule Change to Provide for the Clearance of Additional Western European Sovereign Single Names

On September 3rd, the SEC extended the 45-day time period for action on the proposed rule change, designating October 19, 2015 as the date by which it should either approve or disapprove, or institute proceedings to determine whether to disapprove, ICC’s proposed rule change to provide the basis for ICC to clear additional credit default swap contracts. The proposed rule change would provide the basis for ICC to include the Federal Republic of Germany, the French Republic and the United Kingdom of Great Britain and Northern Ireland in the list of specific Eligible Standard Western European Sovereign (“SWES”) Reference Entities to be cleared by ICC. SEC Release No. 34-75836.


SEC Provides Notice of Filing of Proposed Rule Change and Amendment to Establish a New Auction, BX PRISM

On September 3rd, the SEC published a notice to solicit comments from interested persons on NASDAQ OMX BX, Inc.’s proposed rule change, as modified by Amendment No. 1. NASDAQ proposed to amend BX rules at Chapter VI, Sec. 9, which is currently reserved, to establish a price-improvement mechanism on BX. Submissions should be submitted on or before October 1, 2015. SEC Release No. 34-75827.

Judicial Developments

Court Defers to SEC on Interpretation of Dodd-Frank Whistleblower Protections

On September 10th, the U.S. Court of Appeals for the Second Circuit reversed and remanded a district court ruling that dismissed a finance director’s claims against his former employer for violations of the Dodd-Frank Act’s whistleblower anti-retaliation provisions. The plaintiff was fired after internally reported suspected accounting fraud.  The district court dismissed plaintiff’s claims on the grounds that Dodd-Frank’s anti-retaliation protections only apply when violations are reported to the SEC. The appellate court reversed and remanded, holding that the provisions of the Dodd-Frank Act defining anti-retaliation protections are sufficiently ambiguous and warrant deference to the SEC’s interpretation that anti-retaliation protections extend to whistleblowers who only report violations internally. Berman v. Neo@Ogilvy LLC.

Industry News

Settlement Reached in CDS Antitrust Lawsuit

On September 11th, Bloomberg reported that several large Wall Street banks have reached a settlement with investors who accused the banks of conspiring to limit competition in the credit default swaps (“CDS”) market. The plaintiffs in the case, including some Danish pension funds, alleged that the banks monopolized trading in the market and withheld price and other relevant information from investors to the benefit of the banks’ trading positions. While the terms of the settlement are still being finalized, the banks have agreed to pay $1.87 billion to resolve the matter. CDS Lawsuit.

DOJ Outlines Tougher Approach to Corporate Crime Investigations

On September 10th, Reuters reported that the U.S. Department of Justice (“DOJ”) released new guidelines for how prosecutors should approach cases that involve criminal misconduct by corporate executives.  According to the report, DOJ investigations will focus more on individual misconduct from the outset and companies will only receive credit for cooperating with an investigation if they disclose all of the relevant information about individuals suspected of misconduct. Corporate Crime. On September 10th, DealBook discussed the challenges facing the DOJ in proving criminal misconduct by corporate executives and questioned the ability of the new DOJ guidelines to address the complexity of corporate criminal investigations, especially in the context of the global financial system. Remaining Challenges.

New York Regulator Launches Treasury Auction Manipulation Probe

On September 9th, Reuters reported that the New York Department of Financial Services has made inquiries with several banks, seeking information regarding possible manipulation of U.S. Treasury auctions.  All of the banks targeted by the New York regulator are primary dealers in the U.S. Treasury market, although the report notes the investigation is at an early stage and the inquiries do not necessarily indicate wrongdoing on the part of the banks. News of the investigation underscores the heightened interest in the Treasury market, following news of an investigation by the DOJ in June and a class action lawsuit in July accusing primary dealers of conspiring to manipulate Treasury auctions. Treasury Auction Probe.

Voluntary Audit-Committee Disclosures on the Rise

On September 9th, reported that voluntary audit-committee-related disclosures by large U.S. companies have greatly increased over the past four years. The report is based on a review of 2015 proxy statements by Ernst and Young’s Center for Board Matters, which attributes the increase to the demand by regulators and investors for increased transparency. Audit Disclosures.

Popularity of Risk-Parity Funds and ETFs May Result in Greater Market Volatility

On September 8th, Landon Thomas, Jr., writing for DealBook, discussed the effects the rising popularity of risk-parity funds and exchange-traded funds (“ETFs”) has had on market volatility. According to Thomas, conditions in the bond market have caused the values of risk-parity funds and ETFs to decline, which may prompt investors to unload these investments, which investors initially chose as a way to insulate themselves from risk. Because the popularity of these funds has caused the market to grow large, the potential of a mass offloading of funds by investors could lead to greater turmoil. Volatile Strategies.