Insights from Winston & Strawn

At the end of 2015, President Obama signed into law the Fixing America’s Surface Transportation (FAST) Act (the “FAST Act”). This law amended a number of federal securities laws, including, among others, the Securities Exchange Act of 1934 (the “Exchange Act”) and the Investment Advisers Act of 1940 (the “Advisers Act”). As previously reported in the Winston & Strawn LLP Financial Services Update, following the enactment of this law, the Securities and Exchange Commission (the “SEC”) has been adopting rules to implement the FAST Act.

In March 2016, the SEC provided an IM Guidance Update regarding the impact of the FAST Act on certain of the exemptions from registration for investment advisers under the Advisers Act. The FAST Act amends two exemptions from registration as an investment adviser – the “venture capital fund adviser” exemption and the “private fund adviser” exemption. Under the venture capital fund adviser exemption, investment advisers whose sole clients meet the Advisers Act’s definition of “venture capital funds” are exempt from the requirement that such advisers be registered with the SEC. The FAST Act expands the definition of “venture capital fund” by deeming small business investment companies (“SBICs”) venture capital funds for purposes of the exemption. In sum, advisers whose sole clients are venture capital funds and/or SBICs are not required to register as investment advisers with the SEC. The “private fund adviser” exemption also exempts from registration advisers whose sole clients are “private funds” and that have assets under management of less than $150 million. Under the FAST Act, assets under management attributable to SBICs do not count toward the $150 million cap on assets under the exemption. In other words, when determining an adviser’s assets under management for purposes of the private fund adviser exemption, assets attributable to SBIC clients are not included.

Last week, the SEC continued its implementation of the FAST Act by adopting a number of amendments to the Exchange Act (which were rule changes mandated by the Jumpstart Our Business Startups Act, or the “JOBS Act”). On May 3rd, the SEC adopted the following final rules:

  • Amended the Exchange Act rules governing the registration and termination of registration of securities and the suspension of reporting requirements under the Exchange Act to reflect the thresholds that were previously established by the JOBS Act;
  • Applied the definition of “accredited investor” to determinations as to which record holders are accredited investors for purposes of the Exchange Act’s registration thresholds; and
  • Amended the definition of “held of record” to provide that, when determining whether an issuer is required to register a class of equity securities with the Exchange Act, an issuer may exclude securities held by persons who received them under certain employee compensation plans.

In addition, the SEC adopted a non-exclusive safe harbor regarding the determination of holders of record. In the press release announcing these amendments, SEC Chair Mary Jo White noted, “With the adoption of these amendments, the Commission has completed all of the rulemaking mandated under the JOBS Act.”

Feature: Federal Financial Regulators Proposed Revised Regulations for Incentive Compensation at Financial Institutions

On May 6th, the SEC became the final agency to approve a joint agency notice of proposed rulemaking that re-proposes regulations governing incentive-based compensation practices at certain financial institutions, including banks, asset managers, and broker-dealers. The other agencies involved in developing the proposed rules, including the National Credit Union Administration (“NCUA”), the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“OCC”), the Federal Housing Finance Agency (“FHFA”), and the Federal Reserve Board, previously voted to approve the proposal.  As mandated by the Dodd-Frank Wall Street Consumer Reform and Protection Act (the “Dodd-Frank Act”), the proposed rule would prohibit incentive-based payment arrangements that provide excessive compensation, could potentially result in material loss, or might encourage inappropriate risks by financial institutions. All executive officers, employees, directors and principal shareholders who currently receive incentive compensation would be subject to the rules—stricter requirements would only apply to senior executive officers and other “significant risk-takers.” The limits on incentive-based compensation would apply to certain “covered institutions” with $1 billion or more in total consolidated assets, with larger institutions subject to more stringent requirements. For example, the largest institutions, which are defined in the proposal as those with $250 billion or more in assets, would be required to defer at least 60 percent of a senior executive’s incentive compensation for at least four years. All covered institutions with at least $50 billion in assets would also be required to include clawback provisions in incentive arrangements that would allow the bank to recover bonus compensation for seven years following any significant misconduct by senior executives or other “significant risk-takers.”

As Dan Ryan, Mike Alix, Adam Gilbert, and Armen Meyer of PricewaterhouseCoopers point out in their recent blog post for the Harvard Law School Forum on Corporate Governance and Financial Regulation, the joint agency proposal is hardly earth-shattering news for the industry, as many banks have already implemented deferrals for incentive compensation that roughly correspond to guidelines in the proposed rule. The authors do note some significant differences between the latest proposal and a previous version of the proposed rule that was issued in 2011, as well as similar EU regulations. Most significantly, the proposed rule broadens the scope of employees subject to bonus deferral and clawback requirements in its definition of “senior executive officers” and “significant risk-takers.” The incentive compensation rules would apply to executives who are not normally considered to be major risk-takers, including chief compliance officers, chief accounting officers, and chief credit officers. Additionally, the proposal defines “significant risk-takers” as the top 5 percent of the highest compensated employees at the largest institutions, which will cover more employees. The authors also note that the regulators declined to impose a predetermined bonus cap in contrast with EU regulations, which the authors suggest may help U.S. banks attract top talent.

All of the agencies involved in developing the proposed rules have requested comments, which should be submitted on or before July 22, 2016.

Banking Agency Developments


Federal Banking Agencies Propose Net Stable Funding Ratio Rule

On May 3rd, the FDIC, the Federal Reserve, and the OCC jointly proposed a rule, the net stable funding ratio (“NSFR”), to strengthen the resilience of large banking organizations by requiring them to maintain a minimum level of stable funding relative to the liquidity of their assets, derivatives, and commitments, over a one-year period. OCC Press ReleaseJanet Yellen Statement.


Lawson Elected as State Liaison Committee Chairman

On May 2nd, the Federal Financial Institutions Examination Council (“FFIEC”) announced the election of Karen Lawson as its Chair.

Face Appointed to FFIEC State Liaison Committee

On May 2nd, the FFIEC announced the appointment of Edward “Joe” Face to its State Liaison Committee. Face’s nomination was confirmed by the FFIEC for a two-year term starting May 1, 2016, and continuing through April 30, 2018. FFIEC Press Release.

FFIEC Releases Mobile Financial Services, New Appendix to the Retail Payment Systems Booklet

On April 29th, the FFIEC released a new appendix, “Mobile Financial Services,” to the “Retail Payment Systems” booklet of the FFIEC Information Technology (IT) Examination Handbook. This new appendix focuses on risks associated with activities and devices for mobile financial services. The appendix emphasizes an enterprise-wide risk management approach for effectively managing and mitigating existing and evolving risks. The appendix also contains work program objectives to assist examiners in determining the state of risk and controls at an institution or third-party provider. “Retail Payment Systems” is one of the 11 booklets in the FFIEC IT Examination HandbookFFIEC Press Release.

FFIEC Seeks Comments on Proposed Revisions to Uniform Interagency Consumer Compliance Rating System

On April 29th, the FFIEC sought public comment on its proposal to revise the existing Uniform Interagency Consumer Compliance Rating System to reflect regulatory, supervisory, technological and market changes since the system was established. Comments must be received 60 days from publication in the Federal Register.FFIEC Press Release.

Federal Reserve

Federal Reserve Proposes Rule to Support U.S. Financial Stability by Enhancing Resolvability of Very Large and Complex Financial Firms

On May 3rd, the Federal Reserve proposed a rule to support U.S. financial stability by enhancing the resolvability of very large and complex financial firms. The proposal would require U.S. global systemically important banking institutions (“GSIBs”), as well as the U.S. operations of foreign GSIBs, to amend contracts for common financial transactions in order to prevent immediate cancellation of the contracts if the firm enters bankruptcy or a resolution process. This change should reduce the risk of a run on the solvent subsidiaries of a failed GSIB caused by a large number of firms terminating their financial contracts at the same time. Federal Reserve Board Press ReleaseFederal Register NoticeGovernor Tarullo StatementJanet Yellen Statement.

Federal Reserve Board Appoves Joint Agency Notice to Implement Incentive Compensation provisions of the Dodd-Frank Act

On May 2nd, the Federal Reserve announced that it has unanimously approved a joint agency notice of proposed rulemaking to implement the incentive compensation provisions of Section 956 of the Dodd-Frank Act.Federal Reserve Board Press Release.

Treasury Department Developments

Treasury Department

Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion

On May 5th, the U.S. Department of the Treasury announced numerous actions to strengthen financial transparency and combat the misuse of companies to engage in illicit activities. Treasury Department Press Release.


CFPB Proposes Rule That Would Restore Customers’ Rights to Sue Banks

On May 5th, DealBook reported on the Consumer Financial Protection Bureau’s (“CFPB”) proposed rule that would restore customers’ rights to bring class action suits against financial firms. The proposed rule, which would apply to bank accounts, credit cards, and other types of consumer loans, does not require congressional approval. Pursuant to the rule, lenders would not be able to force people to agree to mandatory arbitration clauses that bar class actions when those customers sign up for financial products. Comments on the proposed rule must be received on or before 90 days after publication in the Federal Register.

Securities and Exchange Commission

Deputy Chief Accountant Discusses Revenue Standard Transition Activities and Non-GAAP Reporting Practices at Financial Reporting Conference

In remarks before the Baruch College Financial Reporting Conference on May 5th, SEC Deputy Chief Accountant Wesley R. Bricker reviewed the ongoing transition period activities for the Financial Accounting Standards Board’s (“FASB”) new standards on revenue recognition and leases as well as the FASB’s proposal on financial instruments’ credit impairment. Bricker also addressed non-GAAP reporting practices, reiterating concerns expressed by other SEC officials and urging companies to review and adjust their practices.  Bricker finally highlighted the importance of the Public Company Accounting Oversight Board’s (“PCAOB”) efforts to improve its standard setting process and its response to emerging risks. Bricker Remarks.

SEC Completes JOBS Act Rulemaking by Implementing Revisions to Exchange Act Registration Requirements

The SEC voted on May 3rd to approve final rules to implement amendments to certain registration requirements under Section 12(g) of the Exchange Act as provided by the JOBS Act and the FAST Act. The JOBS Act amendments revise the Exchange Act rules to reflect new, higher thresholds for registration, termination of registration, and suspension of reporting; amend the definition of “held of record” to exclude certain securities held by persons who received them pursuant to employee compensation plans; and establish a non-exclusive safe harbor for determining holders of record for the purposes of registration under the Exchange Act. The final rules will become effective 30 days after publication in the Federal Register. SEC Press Release. 

SEC Publishes Final Report on 2015 Forum on Small Business Capital Formation

On May 2nd, the SEC released its final report from the 2015 SEC Government-Business Forum on Small Business Capital Formation, which summarizes the proceedings and contains the forum agenda, SEC commissioner remarks, and forum recommendations. SEC Report.

Commodity Futures Trading Commission

CFTC Approves Final Rule on Amendments to the Swap Portfolio Reconciliation Requirement

On May 2nd, the U.S. Commodity Futures Trading Commission (“CFTC”) approved a final rule to amend a requirement that swap dealers (“SD”) and major swap participants (“MSP”) exchange the terms of swaps with their counterparties for portfolio reconciliation so that SDs and MSPs need only exchange the “material terms” of swaps. This requirement is found in CFTC Regulation 23.500(i). The final rule, which is effective May 6, 2016, also amends the definition of “material terms” in CFTC Regulation 23.500(g). CFTC Press Release.

Federal Rules Effective Dates

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Exchanges and Self-Regulatory Organizations

Financial Industry Regulatory Authority

FINRA Announces 2016 GASB Accounting Support Fee

On May 5th, the Financial Industry Regulatory Authority (“FINRA”) announced the rate for the 2016 GASB Accounting Support Fee, which FINRA collects from member firms to fund the annual budget for the Governmental Accounting Standards Board (“GASB”). FINRA will collect a total of $2,077,625 from member firms on a quarterly basis to fund the GASB’s annual budget. FINRA estimates that the annual fee rate will be between $0.0024 and $0.0030 per $1,000 par value of municipal securities transactions. FINRA Regulatory Notice 16-16.

FINRA Offers Additional Guidance on Options Positions Reporting

FINRA published a Regulatory Notice on May 5th that reminds firms of their obligations under FINRA rules to report options positions to the Large Options Positions Reporting system. The Notice provides a summary of previously issued guidance relating to, among other things, the reporting of standardized and conventional options positions, aggregation of accounts and positions, reporting format and specifications, changes to account information, position maintenance records, and effective supervision practices. FINRA Regulatory Notice 16-17.

ICE Clear

SEC Approves ICC’s Revised Operational Risk Management Framework

On May 5th, the SEC approved a proposed rule change filed by ICE Clear Credit LLC (“ICC”) that will implement organizational changes to ICC’s Operational Risk Management Framework related to its operational risk management processes. The revised framework will operate around a five-component operational risk lifecycle that will highlight certain elements of the processes and present them in a more efficient manner; in addition, the revised framework will add information regarding the “assess” and “report” components of the risk assessment process. SEC Release No. 34-77769.

ICC Proposes Changes to the Calculation of Single Name Firm Trade Notional Limits

On May 5th, the SEC requested comments on ICC’s proposed rule change that would revise the ICC End-of-Day Price Discovery Policies and Procedures to change the calculation of single name Firm Trade notional limits to be at a Clearing Participant (“CP”) affiliate group level rather than at the CP level in an effort to limit overnight risk exposure. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 9, 2016. SEC Release No. 34-77771.

International Swaps and Derivatives Association

ISDA Releases Resolution Stay Jurisdictional Modular Protocol

On May 5th, the International Swaps and Derivatives Association (“ISDA”) launched the ISDA Resolution Stay Jurisdictional Modular Protocol, which the ISDA developed to assist market participants in complying with regulatory changes focused on the cross-border enforceability of stays on contractual termination rights. The new Protocol has been designed for use by all market participants by providing separate Jurisdictional Modules that closely reflect the requirements in a particular jurisdiction. ISDA Press Release.

Municipal Securities Rulemaking Board

SEC Approves MSRB’s Proposal to Shorten the Settlement Cycle for Municipal Securities

On April 29th, the SEC approved the Municipal Securities Rulemaking Board’s (“MSRB”) proposed rule change that will define regular-way settlement for municipal securities transactions as occurring on a two-day settlement cycle. The MSRB announced separately that it will communicate the compliance date, which will correspond with the industry’s transition to a T+2 regular-way settlement, for the amended rule in a notice published on its website. SEC Release No. 34-77744.


SEC Approves Nasdaq’s Remote ITTO Wave Ports Proposal, Seeks Comments on Amendment

On May 4th, the SEC issued an order granting accelerated approval of The Nasdaq Stock Market LLC’s (“Nasdaq”) proposed rule change to offer Nasdaq ITCH to Trade Options (“ITTO”) through wireless networks, which will be received and distributed by Remote Wave Ports, for clients co-located at certain third-party data centers and to establish fees for these Remote ITTO Wave Ports. The SEC also requested comment on Nasdaq’s amendment to the proposed rule, which clarified that there will be a one-year minimum purchase period for the ports, that the minimum purchase period will begin at the conclusion of the 30-day testing period, and that Nasdaq will only waive the recurring monthly fee during the 30-day testing period. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 9, 2016. SEC Release No. 34-77765.

National Futures Association

NFA Provides Additional Information on System for Submitting Margin Model Documentation For Review.

On May 4th, the National Futures Association (“NFA”) published a Notice to Members containing information about the system that CFTC Covered Swap Entities will use to submit margin model documentation to the NFA for review. The Notice provides contact information for firms to use to initiate the submission process and step-by-step instructions for submitting margin model documentation through the NFA’s EasyFile Margin Model Submission System. NFA Notice I-16-14.