Insights from Winston & Strawn

Legal and regulatory activity in the financial services sector included a number of actions that will be closely watched, including the Securities and Exchange Commission’s (“SEC”) approval of a plan to implement a consolidated audit trail through a single, comprehensive database.  In addition, the SEC’s Division of Corporation Finance released new additions to its Compliance and Disclosure Interpretations to address issues related to tender offers, disclosure and offering price determinations under Regulation A, and the possibility of relying on both Rule 506(b) and Rule 506(c) in a single offering under Regulation D.  Set out below is a summary of the events and developments that we observed.

We at Winston & Strawn LLP would like wish our readers in the United States a safe, happy, and healthy Thanksgiving holiday.

Banking Agency Developments

Federal Reserve

Federal Reserve Expands Post-Employment Restrictions for Reserve Bank Senior Examiners and Officers

On November 18th, the Federal Reserve Board announced that it has revised its policy on post-employment restrictions applicable to Federal Reserve Bank senior examiners and officers, which prohibits senior examiners for one year from accepting paid work from a financial institution that they had primary responsibility for examining in their last year of Reserve Bank employment. The new policy expands the number of Reserve Bank examiners subject to the post-employment restriction. The new policy also prohibits former Federal Reserve Bank officers from representing financial institutions and other third parties before current Federal Reserve System employees for one year after leaving their Federal Reserve position and imposes a one year ban on current Reserve Bank employees discussing official business with these former officers. The restriction on former officers will be effective on December 5, 2016, and the revised senior examiner policy will be effective on January 2, 2017. 


OCC to Host Mutual Savings Association Advisory Committee Meeting on December 8

On November 17th, the OCC announced that it will host a public meeting of the Mutual Savings Association Advisory Committee on Thursday, December 8, 2016, starting at 8:30am EST. The meeting will be held at the OCC office in Washington, D.C. 20219. The purpose of the meeting is to advise the OCC on regulatory changes or other steps the OCC may be able to take to ensure the continued health and viability of mutual savings associations and other issues of concern to mutual savings associations. Federal Register Notice.


Board Approves Final Rule on Deposit Account Recordkeeping Requirements to Facilitate Timely Access to Deposits in Large Bank Failures

On November 15th, the FDIC announced that it has approved a final rule establishing recordkeeping requirements for FDIC-insured institutions with a large number of deposit accounts to facilitate rapid payment of insured deposits to customers if the institutions were to fail. The rule applies to insured depository institutions with more than two million deposit accounts, and generally requires these institutions to maintain complete and accurate data on each depositor. The institutions are also required to ensure that their information technology systems are capable of calculating the amount of insured money for most depositors within 24 hours of a failure. Chairman Gruenberg Statement.


Request for Information Regarding Consumer Access to Financial Records

On November 17th, the CFPB announced that it is seeking comments from the public about consumer access to financial records, including access by entities acting with consumer permission, in connection with the provision of products or services that make use of that information. Comments should be received within 90 days of publication in the Federal Register.

Regulatory Approvals

SEC Approves Consolidated Audit Trail Plan

At an Open Meeting on November 15th, the SEC approved a national market system (“NMS”) plan to create a consolidated audit trail (“CAT”) that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution in a single, consolidated data source. The CAT NMS plan sets out how self-regulatory organizations (“SROs”) and broker-dealers will record and report required information, which will include a unique identifier for the customer submitting an order; an identifier for the broker-dealer originating, receiving, routing, or executing the order; the date and time of the order event; and the material terms of the order such as the security symbol, price, size, and order type. The plan also establishes how the data in the CAT will be maintained to ensure its accuracy, integrity and security. The SEC modified the original plan to strengthen security requirements, tighten synchronization standards and include additional members to the governance committee. Following the SEC’s approval of the plan, SROs will have 60 days to select a plan processor to build and operate the CAT. SROs will be required to begin reporting to the CAT within one year of approval, while large broker-dealers will be required to comply with the reporting requirements within two year of approval and small broker-dealers within three years of approval. SEC Press Release. See statements in support of the plan by SEC Chair Mary Jo White, Commissioner Michael S. Piwowar, and Commissioner Kara M. Stein.


Corporation Finance Publishes New C&DIs on Tender Offers and Schedules

On November 18th, the SEC’s Division of Corporation Finance updated its Compliance and Disclosure Interpretations (“C&DIs”) on Tender Offer Rules and Schedules. The revised C&DIs address questions on the requirements for a summary of all material terms of employment and other compensation arrangements on Item 5 of Schedule 14D-9 and Item 1009(a) of Regulation M-A and offers guidance on the Division’s January 23, 2015, no-action letter on abbreviated tender or exchange offers for non-convertible debt securities. Tender Offers and Schedules C&DIs

Corporation Finance Offers New Guidance on Regulation A

On November 17th, the SEC’s Division of Corporation Finance published three new C&DIs on Securities Act Rules under Regulation A. New C&DI 182.12 discusses the disclosure requirements for an additional class of securities that an issuer seeks to qualify by post-qualification amendment to a previously qualified offering statement. New C&DI 182.13 addresses how an issuer can determine whether the change in price in an offering exceeds 20% of the maximum aggregate offering price. New C&DI 182.14 explains that an issuer seeking to rely on Regulation A may omit financial information for historical periods if it reasonably believes that those financial statements will not be required at the time of the qualification of the Form 1-A.

Corporation Finance Publishes New C&DI on Regulation D

On November 17th, the SEC’s Division of Corporation Finance revised its C&DIs on Rule 502 of Regulation D to include New C&DI 256.34, which addresses the factors that an issuer would use to determine whether all of the offers and sales made in a private offering made in reliance on Rule 506(b) and a subsequent offering made in reliance on Rule 506(c) would constitute a single offering.

Speeches and Statements

White Advocates for Better Laws to Hold Executives Accountable for Financial Misconduct

On November 18th, the Wall Street Journal reported on SEC Chair Mary Jo White’s remarks at an event at the New York University School of Law on new models for SEC enforcement. In her remarks, White cited the U.K. Financial Conduct Authority’s new Senior Managers Regime as a possible template for targeting corporate wrongdoing by holding senior executives responsible for misconduct at their firms.

House Committee Urges White to Press Pause on SEC Rulemaking 

On November 15th, SEC Chair Mary Jo White testified before the U.S. House of Representatives Financial Services Committee, providing an overview of the SEC’s current work and initiatives in support of the agency’s Fiscal Year 2018 Preliminary Authorization Request. According to a report in Reuters, Representative Jeb Hensarling, the committee chair, discouraged White from rushing outstanding rulemakings to completion before President-elect Donald Trump takes office in January. White indicated that the agency would continue to carry out its rulemaking agenda, but would not rush the process or make any “surprise rulemakings” before she steps down at the end of President Obama’s term.

Other Developments

Investor Advisory Committee to Meet

The SEC’s Investor Advisory Committee will meet on December 8, 2016, to discuss investor protection priorities for the New Year, the election results for open officer positions, and the SEC’s response to the rulemaking mandate of the Fixing America’s Surface Transportation (“FAST”) Act concerning public company disclosure requirements. Written statements to the Committee should be received by December 8, 2016. SEC Meeting Notice.

SEC Holds Annual Small Business Forum

The SEC held its 35th Annual Government Forum on Small Business Capital Formation on November 17, 2016, which included a panel discussion addressing the effectiveness of capital formation options for small businesses after the implementation of the JOBS Act. In remarks to the Forum, SEC Chair Mary Jo White discussed recent SEC rulemaking initiatives relevant to small business capital formation, including proposed rules to increase the financial thresholds in the smaller reporting company definition and final rules that update and modernize the intrastate and regional offering framework. SEC Commission Kara M. Stein noted in her remarks that the use of new capital formation options under Regulation A+ and Regulation Crowdfunding are concentrated by region and sector and urged the Committee to focus on recommendations that emphasize data collection and outreach.

Chair White Announces Plans to Step Down

On November 14th, the SEC announced that SEC Chair Mary Jo White will leave the agency at the end of the Obama Administration. The New York Times offered a retrospective of White’s tenure at the SEC, noting that the remaining rules mandated by the Dodd-Frank Act and a plan to develop a fiduciary rule will likely be removed from the SEC’s agenda by White’s Republican-appointed successor.

Regulators, Providers Discuss Regulation of Automated Advisory Firms at Fintech Forum

Investment News reported on the SEC’s Fintech Forum, which was held on November 14, 2016, to discuss the impact of technological innovation on the financial services industry. Several representatives from automated investment advisory firms told the SEC that investment adviser examinations and rules regarding digital advertising need to be modernized or clarified to account for firms providing automated advice. In a statement to the forum, SEC Chair Mary Jo White indicated that the SEC has been examining how “robo-advisers” comply with their fiduciary obligations as registered investment advisers and design their compliance programs. See also remarks by SEC Commissioner Michael S. Piwowar.

SEC Approves PCAOB’s 2016 Supplemental Budget Request to Address Shortfall in Inspections Budget

The SEC issued an order on November 14th that approves the Public Company Accounting Oversight Board’s (“PCAOB”) supplemental budget request for calendar year 2016. The PCAOB had requested approval to transfer $1 million of fiscal year 2016 funding from programs where the PCAOB has a 2016 underspend to cover a projected overspend in inspections-related travel costs. SEC Release No. 33-10255.

Whistleblower Earns $20 Million Award for Timely Tip 

The SEC announced on November 14th that it has awarded $20 million, its third highest award, to a whistleblower who provided timely and valuable information that allowed the SEC to initiate an enforcement action in time to recover nearly all of the investor funds misappropriated by the individuals involved in the scheme.

Commodity Futures Trading Commission

DMO Issues Reminder of Upcoming Expiration of Certain No-Action Relief from Ownership and Control Final Rule

On November 16th, the CFTC’s Division of Market Oversight reminded all participants in CFTC-regulated derivatives markets of the upcoming scheduled expiration of certain no-action relief associated with the Ownership and Control Final Rule. Specifically, with the expiration of certain relief in CFTC Letter No. 16-32, certain electronic submission requirements for Forms 40/40S and 71 will begin on November 18, 2016, at 12am EST. 

CFTC Staff Issues Results of Supervisory Stress Test of Clearinghouses

On November 16th, the CFTC announced that its staff has issued a report detailing the results of a supervisory stress test of major clearinghouses. The purpose of the analysis was to assess the impact of a hypothetical set of extreme but plausible market scenarios across multiple clearinghouses and their clearing members. Q&A – Staff Supervisory Stress Test of Clearinghouses.

Federal Rules Effective Dates

November 2016 – January 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

BATS Global Markets

SEC Takes More Time to Consider EDGX’s Proposed Price Improvement Auction

On November 17th, the SEC designated January 3, 2017, as the date by which it will approve, disapprove, or instituted disapproval proceedings regarding Bats EDGX Exchange, Inc.’s (“EDGX”) proposed rule change for EDGX’s equity options platform to adopt a price improvement auction, the Bats Auction Mechanism. SEC Release No. 34-79339.

Chicago Board Options Exchange

C2 Proposes Changes to Rules Related to Opening of Series for Trading

On November 15th, the SEC requested comments on C2 Options Exchange, Incorporated’s (“C2”) proposed rule change that will make changes to its rules on the opening of series for trading on the exchange. Among other things, the proposal will reorganize, simplify, and make other changes to the rule describing the process that C2’s automated trading system for the trading of options contracts uses to open series on the exchange each trading day to reflect current system functionality. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 21, 2016. SEC Release No. 34-79315.

Financial Industry Regulatory Authority

SEC Approves FINRA’s Proposal to Require Mark-Up Disclosures for Transactions in Fixed Income Securities

On November 17th, the SEC issued an order granting accelerated approval to the Financial Industry Regulatory Authority’s (“FINRA”) proposed rule amendments that require FINRA members to disclose additional pricing information, including the member’s mark-up/mark-down from the prevailing market price, on retail customer confirmations relating to certain transactions in fixed income securities. The SEC also requested comments on FINRA’s amendment to the proposal. Comments should be submitted within 21 days of publication in the Federal Register, which is expected shortly. SEC Release No. 34-79346.

FINRA Offers Guidance on New Academic Corporate Bond TRACE Data Product

In a Regulatory Notice published on November 16th, FINRA provided an overview of rule amendments approved by the SEC that will permit FINRA to create the Academic Corporate Bond TRACE Data product. The new product will be available solely to institutions of higher education and will provide academics with access to Trade Reporting and Compliance Engine (“TRACE”) historical transaction-level data on corporate bonds, on a 36-month delayed basis, that includes masked identifying information regarding the dealer reporting each transaction. The product will be available to institutions of higher education for a fee beginning on February 27, 2017.

SEC Approves FINRA’s Proposal to Allow Parties in Arbitration or Mediation to Use Party Portal for Certain Communications

On November 14th, the SEC approved FINRA’s proposed rule change that will amend its code of arbitration procedures for customer and industry disputes to require all parties, except pro se customers, to use the FINRA Office of Dispute Resolution’s Party Portal to file initial statements of claim and to file and serve pleadings and other documents on FINRA or any other party. The rule change will also amend FINRA’s mediation procedures to allow mediation parties to agree to use the Party Portal to submit and retrieve all documents and other communications. SEC Release No. 34-79296.

FINRA Revises Alert on Binary Options Risk Following Warnings by SEC and CFTC of Fraudulent Schemes

On November 11th, FINRA updated its investor alert on risks of trading binary options to reflect recent alerts issued by the SEC and the CFTC. FINRA’s alert warns investors to be especially wary of non-U.S. companies that offer binary options trading platforms and to be alert to signs of fraud if they have already opened an account.  

ICE Clear Credit

ICC Proposes Changes to Clearing Rules to Address Default Risks

On November 16th, the SEC provided notice of a proposed rule change filed by ICE Clear Credit LLC (“ICC”) that would amend its rules relating to default management, clearing house recovery and wind-down to address the risk of uncovered losses from a clearing participant default, and would adopt certain related default auction procedures. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 21, 2016. SEC Release No. 34-79324.

Municipal Securities Rulemaking Board

SEC Approves MSRB’s Proposal to Require Mark-Up Disclosures to Retail Investors

On November 17th, the SEC granted accelerated approval to the Municipal Securities Rulemaking Board’s (“MSRB”) proposed rule amendments that will require brokers, dealers and municipal securities dealers to disclose mark-ups and mark-downs to retail customers on certain principal transactions and to provide dealers guidance on prevailing market price for the purpose of calculating mark-ups and mark-downs. The SEC also requested comments on MSRB’s amendment to the proposed rule change. Comments should be submitted within 21 days of publication in the Federal Register, which is expected shortly. SEC Release No. 34-79347.

MSRB Proposes to Modernize Customer Complaint and Recordkeeping Rules and Apply Rules to Municipal Advisors

On November 14th, the SEC requested comments on the MSRB’s proposal to amend Rule G-10, on delivery of investor brochure; Rule G-8, on books and records to be made by brokers, dealers; and municipal securities dealers and municipal advisors, and Rule G-9, on preservation of records. The MSRB also filed a proposed notice regarding electronic delivery and receipt of information by municipal advisors under Rule G-32, on disclosures in connection with primary offerings. The proposed rule change would extend MSRB’s customer complaint and recordkeeping rules to municipal advisors and modernize those rules. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 21, 2016. SEC Release No. 34-79295.

MSRB Cautions Investors about Risks of Rising Interest Rates in Municipal Market

The MSRB released a statement on November 14th that reminds investors about the potential risks posed by rising interest rates to bond positions and bond portfolios. The MSRB issued the statement in response to a recent hike in municipal bond yields. MSRB Press Release.


SEC Starts Disapproval Proceedings on Phlx’s Proposed Exception for Execution of Sub-MPV Split-Price Orders. On November 17th, the SEC instituted disapproval proceedings regarding NASDAQ PHLX LLC’s (“Phlx”) proposal to provide an additional exception to the mandatory use of Phlx’s Floor Broker Management System to permit Floor Brokers to execute certain sub-minimum price increment split-price orders in the trading crowd. Comments should be submitted within 21 days of publication in the Federal Register, which is expected shortly. Rebuttal comments are due within 35 days. SEC Release No. 34-79345.

SEC Approves Phlx’s Changes to Rules on Specialists

On November 16th, the SEC issued an order approving Phlx’s proposed rule change to delete or amend its rules relating to specialists. SEC Release No. 34-79322.

National Futures Association

NFA Announces Nominations for Board of Directors and 2017 Nominating Committee

On November 16th, the National Futures Association (“NFA”) announced the list of nominees for positions on NFA's Board of Directors and 2017 Nominating Committee. The NFA reminded members that other nominations may be made by petition, which should be submitted by mail, email or fax for receipt no later than December 7, 2016. 


NYSE Arca Proposes New Order Entry Platform for Qualified Contingent Cross Orders

On November 16th, the SEC requested comments on a proposed rule change filed by NYSE Arca, Inc. (“NYSE Arca”) that would introduce NYSE OptX, an order entry platform that would utilize a combination of Instant Messaging and browser-based technology to allow for the submission of Qualified Contingent Cross orders by OTP Holders and OTP Firms. Comments should be submitted within 21 days of publication in the Federal Register, which is expected shortly. SEC Release No. 34-79327.

SEC Begins Disapproval Proceedings Regarding NYSE’s Proposed Changes to Co-location Services and Fees

On November 15th, the SEC instituted disapproval proceedings regarding the New York Stock Exchange LLC’s (“NYSE”) proposal to amend its co-location services by, among other things, providing additional information regarding access to various trading and execution services; connectivity to market data feeds and testing and certification feeds; and connectivity to Third Party Systems. NYSE also proposed to establish fees relating to these services. Comments should be submitted within 21 days of publication in the Federal Register, which is expected shortly. Rebuttal comments are due within 35 days. SEC Release No. 34-79316.

Industry News

SEC Will Continue to Crackdown on Employer Practices that Stifle Whistleblower Activity

The SEC’s Office of the Whistleblower indicated that it will continue to target efforts by employers to stifle whistleblower activity through confidentiality clauses in severance and other kinds of agreements, according to a report in Think Advisor on November 18th. The article examines the SEC’s 2016 annual report to Congress on the Dodd-Frank Whistleblower Program, which highlights the program’s achievements in 2016. The SEC reported that it issued a record amount of whistleblower awards in fiscal year 2016, totaling more than $57 million.

Minneapolis Federal Reserve Chief Proposes Elimination of ‘Too Big to Fail’ Banks

Neel Kashkari of the Federal Reserve Bank of Minneapolis said in a speech before the Economic Club of New York that Wall Street banks are still too big to fail and the post-financial crisis regulations are not adequate protection against another financial shock. According to DealBook on November 16th, Mr. Kashkari proposed that regulators take even more radical steps to boost capital levels at the big banks because the risk of another financial disaster outweighed the costs of increased regulation. Mr. Kashkari’s proposal, called the Minneapolis Plan, would most likely pressure banks to break apart because the high cost of holding such a high amount of capital would mean it would no longer make sense to stay so large.