Insights from Winston & Strawn

Risk Alert on Recent Ransomware Attacks.

Last week, it was announced that hackers had engaged in a widespread attack using ransomware called WannaCry, WCry, or Wanna Decryptor in which all files on a computer system were encrypted and threatened with deletion unless the users paid between $300 and $600 to various bitcoin accounts.  Many commenters have noted that while the attack impacted more than 300,000 systems and made worldwide news, there were a number of elements of the attack that could have made it substantially worse.

The attack was developed from tools that are largely believed to have been developed by the U.S. National Security Agency (“NSA”) and published an article over the weekend which discussed that the same NSA tools used and computer/system vulnerabilities exploited in WannaCry were already being developed into more sophisticated and potentially more dangerous malware. 

On May 17th, the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert addressing the hack and encouraging broker-dealers, investment advisers, and investment companies to reassess their cybersecurity risks and response capabilities. 

In a recent survey of companies registered with the SEC, the SEC found that a significant number of firms examined: (i) did not conduct periodic risk assessments of critical systems to identify cybersecurity threats, vulnerabilities, and the potential business consequences; (ii) did not conduct penetration tests and vulnerability scans on systems that the firms considered to be critical; and (iii) had a significant number of critical and high-risk security patches that were missing important updates despite having a process in place for ensuring regular system maintenance.

The SEC directed registrants to review past cybersecurity releases, including:

Feature: European Commission Announces Changes to Derivatives Rules, and Hints at More to Come 

As a result of its assessment of the effectiveness of the European Market Infrastructure Regulation (“EMIR”), the European Commission announced on May 4th that it has proposed some targeted reforms to the regulation designed to simplify and make more proportionate the rules for over-the-counter (“OTC”) derivatives. Jyrki Katainen, Vice-President for Jobs, Growth, Investment and Competitiveness at the European Commission, said that the proposed changes should “eliminate disproportionate costs and burdens to small companies in the financial sector, corporates and pension funds … without endangering financial stability.”

Among the key changes in the proposal is a streamlined reporting process for counterparties. The new reporting requirements would eliminate dual-sided reporting by permitting financial counterparties to report derivatives transactions involving small non-financial counterparties to the central counterparty (“CCP”) on behalf of both counterparties. Additionally, intragroup transactions will no longer be reported if one of the counterparties is a non-financial company.

The proposal would also introduce a clearing threshold for small financial counterparties to address the difficulties they currently face in finding clearing services providers. While small financial counterparties would still be subject to requirements to report and collateralize OTC derivative transactions, they would only be required to centrally clear transactions if they exceed the proposed threshold.

Pension funds would also find relief under the proposed changes. The European Commission has proposed a three-year temporary exemption for pension funds from central clearing to provide pension funds, CCPs, and clearing members time to devise a solution to the problems posed by central clearing to pension funds, including the lack of access to cash collateral and the need to protect the revenue of future pensioners. In a separate question-and answer-document, the Commission noted that the exemption would help pension funds avoid facing approximately €1.6 billion in additional costs.

In addition to the proposals outlined in the announcement, the European Commission indicated that additional changes may be on the horizon this summer. The additional proposals floated by the Commission would focus on ensuring that CCPs serving EU financial markets are “subject to the safeguards provided by the EU legal framework, including, where necessary, enhanced supervision at EU level and/or location requirements.” A move to bring CCPs under EU supervision would have enormous impact on the United Kingdom after it completes negotiations to leave the EU since, as the Financial Times observed, “the City of London … clears around 75 per cent of all euro-denominated swaps.” Indeed, some observers interpreted the proposal as a direct message to the U.K. as it prepares to begin Brexit negotiations. The New York Times called the announcement “an opening salvo … that could threaten London’s status as the undisputed financial capital of Europe.”

Reaction to the European Commission’s announcement was guarded. Bloomberg warned that requiring counterparties to physically relocate from the U.K. to the EU “could trigger a collateral squeeze or breakdown in the ability to settle that makes it harder for companies to access capital.” Reuters reported that Acting Commodity Futures Trading Commission (“CFTC”) Chair Christopher Giancarlo greeted the proposal with skepticism, advising the European Commission to “think carefully” before enacting major changes to the location of clearing activity for euro-denominated securities. Giancarlo also indicated support for a less radical approach that would increase supervision of foreign clearing members involved in large amounts of euro clearing. Giancarlo pointed out that “the U.S. has not deemed a body of water – even as large as the Atlantic Ocean – as an impediment to effective CCP supervision and examination.”

Banking Agency Developments


Hosts Atlanta Workshop for Board Directors and Now for Bank Management

On May 16th, the Office of the Comptroller of the Currency (“OCC”) announced that it will host a workshop in Atlanta at the Sheraton Atlanta Hotel, June 26-28, for directors, senior management team members and other key executives of national community banks and federal savings associations supervised by the OCC. The Building Blocks for Directors workshop, which will provide practical information on the roles and responsibilities of board participation, will focus on duties and core responsibilities of directors and management, discuss major laws and regulations, and increase familiarity with the examination process.

Securities and Exchange Commission

No-Action Relief and Exemptive Orders

Yahoo! May Rely on Formula to Decide Final Purchase Price Paid for Shares of Common Stock in Planned Issuer Tender Offer

On May 12th, Yahoo! Inc. and Verizon entered into a stock purchase agreement for a sale transaction which, once completed, will result in Yahoo! becoming an investment company registered under the Investment Company Act of 1940 and shares of common stock being removed from the S&P 500 index. The Division of Corporation Finance’s Office of Mergers and Acquisitions determined that it will not recommend that the Securities and Exchange Commission (“SEC”) take enforcement action if Yahoo! relies on a defined formula to decide the final purchase price paid for the shares of common stock tendered into, and the number of shares ultimately accepted in, its planned issuer tender offer.    

Other Developments

Staff Announcements

On May 19th, the SEC announced that David Peavler, the Associate Director of Enforcement in the Fort Worth Regional Office, will leave the SEC this month. On May 15th, the SEC announced that Sean Memon will serve as the SEC’s deputy chief of staff. The SEC also announced the appointment of Robert B. Stebbins to the role of General Counsel of the SEC. The SEC named Jaime Klima to serve as Chief Counsel to SEC Chair Jay Clayton.

Commodity Futures Trading Commission

CFTC Launches LabCFTC as Major FinTech Initiative

On May 17th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced that it has approved the creation of LabCFTC, a new initiative aimed at promoting responsible FinTech innovation to improve the quality, resiliency, and competitiveness of the markets the CFTC oversees. See Address of CFTC Acting Chairman J. Christopher Giancarlo before the New York FinTech Innovation Lab. Also see Statement of CFTC Commissioner Sharon Y. Bowen on the Launch of LabCFTC.     

Division of Clearing and Risk Extends No-Action Relief for Shanghai Clearing House

On May 16th, the U.S. Commodity Futures Trading Commission’s (“CFTC”) Division of Clearing and Risk (“DCR”) announced that it has issued a no-action letter extending the relief provided to the Shanghai Clearing House (“SHCH”) in CFTC Letter 16-56, which expires on May 31, 2017. The extension will last until the earlier of November 30, 2017 or the date on which the CFTC exempts SHCH from registration as a derivatives clearing organization (“DCO”). The letter provides that DCR will not recommend that the CFTC take enforcement action against SHCH for failing to register as a DCO pursuant to Section 5b(a) of the Commodity Exchange Act in light of SHCH’s pending petition for an exemption from registration as a DCO. Pursuant to this relief, SHCH is permitted to clear certain swaps subject to mandatory clearing in the People’s Republic of China for the proprietary trades of SHCH clearing members that are U.S. persons or affiliates of U.S. persons. 

Federal Rules Effective Dates

May 2017 – July 2017

Securities and Exchange Commission

July 1, 2017             Technical Amendments to Form ADV and Form ADV-W. 82 FR 21472.

May 30, 2017          Securities Transaction Settlement Cycle. 82 FR 15564.

Exchanges and Self-Regulatory Organizations

Bats Global Markets

BZX Withdraws Proposal to Modify Company Listing Fees

On May 18th, the SEC announced that Bats BZX Exchange Inc. (“BZX”) has withdrawn its proposed rule change that would amend the fees applicable to securities listed on BZX and the fee schedule applicable to Members and non-Members of BZX. SEC Release No. 34-80714.

BZX Proposes New Closing Match Process

On May 16th, the SEC requested comments on a proposed rule change filed by BZX that would introduce a closing match process for non-BZX Listed Securities called Bats Market Close. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 22, 2017. SEC Release No. 34-80683.     

BOX Options Exchange

SEC Delays Action on BOX’s Proposed Open-Outcry Rules

On May 18th, the SEC designated August 2, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding a proposed rule change filed by BOX Options Exchange LLC (“BOX”) to adopt rules for an open-outcry trading floor. SEC Release No. 34-80719.

SEC Seeks Input on BOX’s Revised Proposal for Open-Outcry Rules

On May 18th, the SEC requested comments on BOX’s amended proposal to adopt rules for an open-outcry trading floor, which clarifies the public outcry process, provides more specificity on how trade-through and priority rules are enforced, and offers clarity on the handling of orders by Floor Brokers, among other changes. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 22, 2017. SEC Release No. 34-80720.     

Financial Industry Regulatory Authority

FINRA Announces Final Workshop on TRACE Reporting of U.S. Treasury Securities

The Financial Industry Regulatory Authority (“FINRA”) will hold its final phone-in workshop to assist firms in complying with the requirement to report transactions in U.S. Treasury Securities to the Trade Reporting and Compliance Engine (“TRACE”), which will be required starting on July 10, 2017. The workshop, which will take place on June 8, 2017, will include a review of relevant rules, regulations, testing, and technical information. FINRA Press Release.

FINRA Updates Investor Alert on Crowdfunding

On May 17th, FINRA published an updated version of its Investor Alert on crowdfunding and the Jumpstart Our Business Startups Act (“JOBS Act”) to reflect the inflation-adjusted increase in investment limits for securities-based crowdfunding approved by the SEC earlier this month.

FINRA Proposes Changes to Delay Period for Historic TRACE Data Sets

On May 16th, the SEC provided notice of a proposed rule change filed by FINRA that would amend FINRA Rule 7730 to reduce the delay period for the Historic TRACE Data Sets relating to corporate and agency debt securities from 18 months to six months. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 22, 2017. SEC Release No. 34-80685.

FINRA Seeks Comments on Rules Governing Outside Business Activities and Private Securities Transactions

On May 15th, FINRA announced that it has launched a review of its rules governing the outside business activities and private securities transactions of employees of broker-dealers. As part of the review, FINRA is seeking comments on the effectiveness of these rules, the economic impact of the rules, and challenges faced by firms in complying with the rules. Comments should be submitted on or before June 29, 2017.     

Fixed Income Clearing Corporation

FICC Proposes Changes to Clearing Rules for Mortgage-Backed Securities

On May 18th, the SEC requested comments on a proposed rule change filed by the Fixed Income Clearing Corporation (“FICC”) that would modify FICC’s Mortgage-Backed Securities Division (“MBSD”) Clearing Rules with respect to time of novation; the treatment of FICC as the settlement counterparty for SBO-Destined Trades, Trade-for-Trade Transactions, and Specified Pool Trades; and the adoption of new processes that would promote operational efficiencies for MBSD Clearing Members. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 22, 2017. SEC Release No. 34-80716.

Municipal Securities Rulemaking Board

SEC Approves MSRB’s Continuing Education Requirements

On May 16th, the SEC issued an order approving the Municipal Securities Rulemaking Board’s (“MSRB”) proposal to amend its rules on professional qualification requirements and on books and records to establish continuing education requirements for municipal advisors. SEC Release No. 34-80699.


NYSE Arca Proposes Rule Changes Related to Equity Index-Linked Securities

On May 17th, the SEC requested comments on a proposed rule change filed by NYSE Arca Inc. (“NYSE Arca”) to amend NYSE Arca Equities Rule 5.2(j)(6) to exclude Investment Company Units and securities defined in Section 2 of NYSE Arca Equities Rule 8, as well as Index-Linked Securities, when applying the quantitative generic listing criteria applicable to Equity Index-Linked Securities. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 22, 2017. SEC Release No. 34-80707.

SEC Approves NYSE MKT’s Delay Mechanism

On May 16th, the SEC issued an order approving a proposed rule change filed by NYSE MKT LLC (“NYSE MKT”) that would amend its rules to provide for an intentional access delay to certain inbound and outbound order messages on Pillar, which would add 350 microseconds of latency to inbound and outbound order messages. SEC Release No. 34-80700.

NYSE Proposes Changes to Shareholder Vote Requirement on Business Combinations

On May 15th, the SEC provided notice of a proposed rule change filed by the New York Stock Exchange LLC (“NYSE”) that would amend its listing standards for Acquisition Companies (“ACs”) to change its shareholder vote requirement for the approval of a Business Combination by requiring approval by a majority of all votes cast on the proposal, rather than just votes cast by public shareholders. Comments should be submitted on or before June 9, 2017. SEC Release No. 34-80677.

SEC Takes More Time to Consider NYSE’s Proposed Changes to Listing Requirements

On May 12th, the SEC designated June 29, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning NYSE’s proposed rule change to modify the provisions of its Listed Company Manual to permit the listing of companies without a prior Securities Exchange Act registration and an underwritten offering immediately upon effectiveness of an Exchange Act registration statement without a concurrent public offering registered under the Securities Act, provided the company meets all other listing requirements. SEC Release No. 34-80670.

Industry News

Trump Administration Will Not Break Up Big Banks

On May 18th, The Wall Street Journal reported on Treasury Secretary Steven Mnuchin’s statement to a congressional panel that he does not support the forced separation of commercial and investment banking.     

FINRA Sees Huge Drop in ‘Layering Exceptions.’

On May 17th, Reuters reported on FINRA’s announcement that it has seen a 68% decline in “layering,” an illegal operation used to create the appearance of buying or selling interest in a way that will move the market to a trader’s advantage. To achieve that objective, a trader would place several layers of prices on one side of an order with no intention of filling those orders.     

Companies May Adjust Revenue in Response to Investor Behavior

The American Accounting Association found that companies may manipulate their financial results in response to investor behavior. CFO.    

Activist Investors Are Now Targeting CEOs

On May 15th, The Wall Street Journal reported that activist investors, no longer satisfied with board seats and buybacks, have reached a new level of aggressiveness by now targeting chief executives at the outset of campaigns.