Insights from Winston & Strawn
On August 10th SEC Commissioner Luis Aguilar issued a statement reiterating the need for published SEC enforcement orders to include sufficiently detailed descriptions of relevant facts, misconduct, and sanctions and remedies so that the orders consistently provide “clear and transparent” direction to the securities industry regarding what is, and what is not, acceptable behavior.
Commissioner Aguilar’s statement emphasizes the need for clarity in all enforcementrelated orders, generally, but also stresses the special importance of clarity in enforcement orders involving federal securities law violations by Chief Compliance Officers (CCOs).
Noting that the very purpose of a CCO is to implement policies and procedures within its organization to prevent federal securities law violations, Commissioner Aguilar – himself a former general counsel and head of compliance at a global asset management firm – stresses that the content of enforcement orders involving CCO violations receives particularly close scrutiny from, and provides particularly pertinent guidance to, the compliance community. Commissioner Aguilar, who has previously written on compliancerelated enforcement matters, also notes public attention given to certain recent CCOrelated enforcement actions, citing (among other references) this recent briefing published by Winston & Strawn LLP.
To be sure, Commissioner Aguilar’s statement acknowledges that certain factors can limit the facts and detail that is included in an enforcement order. First, an enforcement order need only include the facts necessary to support any charges alleged in the order. Second, in the case of enforcement orders describing a settlement between the SEC and a respondent, the facts included in such an order are often negotiated between the SEC and settling respondent. In these situations, the SEC must weigh the public’s interest in a just and speedy resolution versus continuing to negotiate the inclusion of further details in the enforcement order.
Nevertheless, Commissioner Aguilar’s statement notes that enforcement orders are often the primary or only public record with respect to certain proceedings. Considering this, in order to ensure that the SEC’s enforcement orders achieve their purpose of informing securities industry participants and the public about misconduct and deterring such misconduct in the future, Commissioner Aguilar asserts that the SEC must remain vigilant in publishing enforcement orders that are as “clear, transparent, and precise” as possible.
Please contact your Winston and Strawn LLP attorney to discuss SEC enforcement and compliancerelated matters.
Feature: Swap Entity Registration
Given the attention it received, it would be easy to assume that the Securities and Exchange Commission (“SEC”) only adopted one new final rule this month, the pay ratio disclosure rule, which requires public companies to disclose the ratio of the compensation of their chief executive officers to the median compensation of their employees. But, in fact, the SEC adopted two. The second rule describes the process by which security based swap dealers and major securitybased swap participants, collectively referred to as “SBS Entities,” will register with the SEC. In connection with that new final rule, the SEC also voted to propose Rule of Practice 194, which would provide a process for a registered SBS Entity to apply to the Commission for an order permitting the SBS Entity to continue to engage in securitybased swaps activities through associated persons subject to certain adverse legal actions if doing so would be consistent with the public interest.
The new final rule addresses all aspects of the registration regime for SBS Entities, setting forth the information required to be provided and kept up to date by a registrant. The rule also requires senior officers to make certifications about the registrant’s policies and procedures for compliance with the federal securities laws at the time of registration.
The first certification requires a senior officer of the applicant to certify that, after due inquiry, he or she has reasonably determined that the applicant has developed and implemented written policies and procedures reasonably designed to prevent violations of the federal securities laws and that he or she has documented the process by which that determination was reached. The second certification requires the SBS Entity’s Chief Compliance Officer (“CCO”) to certify that the CCO neither knows, nor should have known, that any person who is involved in effecting securitybased swaps for the SBS Entity is subject to a statutory disqualification. To support that second certification the CCO must review and sign the employment questionnaire or application of those natural persons involved in transacting securitiesbased swaps for the SBS Entity.
Although the new final rule is effective October 13, 2015, the compliance date for the rule will be based on the implementation of the business conduct, financial responsibility, and recordkeeping rule for registered SBS Entities, as well as the finalization of proposed Rule of Practice 194.
Proposed Rule of Practice 194 would establish a comprehensive process for SBS Entities to apply to the Commission for permission to continue effecting securitybased swaps activities through associated persons that have been subject to a statutory disqualification, socalled “bad actors.” Under the proposal, statutorily disqualified associated persons that are entities would be able to effect securitybased swaps activities on behalf of the SBS Entity for a limited period of time while the Commission evaluates the SBS Entity’s application. However, a statutorily disqualified associated person that is a natural person would not be so permitted.
Comments on proposed Rule of Practice 194 should be submitted within 60 days after publication in the Federal Register, which is expected shortly.
Banking Agency Developments
Joint Agency Actions
Bank to Pay $18.5 Million for Failing to Credit Full Deposit Amounts
On August 12th, the Consumer Financial Protection Bureau (“CFPB”) announced that it, along with the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”), took action against a bank for failing to credit consumers the full amounts of their deposited funds. The bank kept money from deposit discrepancies when receipts did not match actual money transferred. The CFPB consent order requires the bank to provide approximately $11 million in refunds to consumers and pay a $7.5 million penalty for the violations. Bank Action. See also CFPB Director Remarks; OCC Press Release; FDIC Press Release; and FDIC Order.
Federal Reserve Board
FRB Offers SevenDay Term Deposits Through its Term Deposit Facility
On August 12th, the Federal Reserve Board (“FRB”) announced that it will conduct a floatingrate offering of term deposits with an early withdrawal feature through its Term Deposit Facility (“TDF”). The FRB will offer sevenday term deposits with a rate set equal to the sum of the interest rate paid on excess reserves (currently 25 basis points) plus a fixed spread of one basis point. The maximum tender amount per institution will be $5,000,000,000.
FRB Clarifies Regulation II (Debit Card Interchange Fees and Routing)
On August 10th, the FRB clarified Regulation II (Debit Card Interchange Fees and Routing) concerning the inclusion of transactionmonitoring costs in the interchange fee standard. Among other things, Regulation II implements standards for assessing whether interchange transaction fees for electronic debit transactions are reasonable and comparative to the cost incurred by the issuer, as required by section 920 of the Electronic Fund Transfer Act. The clarification is effective immediately.
Treasury Department Developments
OFR Publishes Working Paper on Equity Trading Correlations
On August 13th, the Office of Financial Research (“OFR”) published a working paper regarding how the degree of correlation among stock returns affects the possibility to diversify the risk of investment, and how it plays a major role in financial spillover.
Securities and Exchange Commission
Speeches and Statements
Commissioners Call for Rules Requiring Disclosure of MarkUps and Mark Downs
On August 13th, SEC Commissioners Aguilar, Gallagher, Piwowar, and Stein released a joint statement in response to an enforcement action against Edward D. Jones & Co. Inc, in which the brokerage firm and the head of its municipal underwriting desk settled allegations that they improperly offered clients new bonds at prices higher than the initial offering price. The Commissioners urged the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (“MSRB”) to complete rulemaking mandating the disclosure of markups and markdowns. The Commissioners suggested that, in the absence of action by FINRA and the MSRB, the SEC should propose rules requiring transparency of markups and markdowns. Joint Statement.
Piwowar Details Objections to Pay Ratio Disclosure
On August 7th, Commissioner Michael Piwowar elaborated upon his dissent from the pay ratio disclosure rule adopted by the SEC at its August 5th open meeting. Commissioner Piwowar raised several objections to the content of the rule and the manner in which it was adopted, arguing that the adopting release failed to provide sufficient explanation of the purpose of the rule in violation of the Administrative Procedure Act; the Commission acted arbitrarily and capriciously when it limited the de minimis exclusion of nonU.S. employees to five percent and included contract workers employed by unaffiliated third parties in the definition of employee under the rule; the Commission failed to consider the impact of the rule upon CEO compensation in its economic analysis; and the use of pay ratio by investment advisers for comparative purposes may violate their fiduciary duties. Piwowar Remarks.
SEC Focus On Asset Managers Creates Opportunities for Insurers
On August 13th, Chief Investment Officer reported that insurance companies are responding to the SEC’s heightened focus on the fund management industry by offering increased coverage for asset managers. The report noted that an increase in enforcement actions, whistleblower activity, and investment adviser examinations by the SEC has increased asset managers’ exposure to liability and risk. Asset Manager Insurance.
Taking Pay Ratio Disclosure Step by Step
On August 13th, Robin Ferracone, writing in Forbes, advised companies on strategies and steps to consider as they prepare to comply with the SEC’s recently adopted pay ratio disclosure rule. While Ferracone expressed doubts regarding the rule’s effectiveness in assisting investors, she set out the three steps companies will need to take in preparing the CEO to median employee pay ratio. Ferracone advised companies to minimize the narrative they provide to explain their pay ratio disclosure unless elaboration would be to their benefit. Compliance Steps.
Precidian Takes Another Stab at NonTransparent ETF
On August 11th, InvestmentNews reported that Precidian Investments has submitted a new proposal to the SEC for an exchangetraded fund (“ETF”) that would not disclose the stocks and bonds held by its managers. The SEC has raised concerns regarding the viability of a nontransparent ETF in response to proposals previously submitted by Precidian. ETF Proposal.
OIG Reports Status of ALJ Bias Investigation
On August 7th, the SEC’s Office of the Inspector General released an Interim Report of Investigation detailing the status of its investigation of alleged bias on the part of ALJs in Commission administrative proceedings. According to the report, the investigation to date has not discovered any evidence corroborating the allegations of bias by ALJs in their decisions issued in administrative proceedings. OIG Interim Report.
Commodity Futures Trading Commission
CFTC Commissioner Announces His Resignation
On August 14th, U.S. Commodity Futures Trading Commission (“CFTC”) Commissioner Mark P. Wetjen announced his resignation from the CFTC, effective August 28th, 2015. As Commissioner, Wetjen, among other things, helped implement the DoddFrank Act. Wetjen Resignation.
Wall Street Banks Close to Winning Further Delay of U.S. Curbs on Overseas Swaps
On August 10th, Bloomberg Business wrote that Wall Street banks might soon win a further delay of a U.S. policy that clamps down on their overseas derivatives trades. According to two unnamed sources, the CFTC will probably postpone plans to subject transactions that are set up in the U.S., but are held in overseas divisions, to DoddFrank Act trading regulations. The sources noted that the regulator is weighing how long the delay should be. The policy, set to take effect on September 30th, has already been delayed four times. Overseas Swaps. See also NoAction Relief Letter and Press Release.
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Exchanges and SelfRegulatory Organizations
BATS Exchange, Inc.
BATS Proposes Rules Prohibiting Spoofing and Layering
On August 13th, the SEC announced that BATS Exchange, Inc. (“BATS”) has proposed a new rule that would define layering and spoofing more specifically and prohibit these activities on the exchange, along with rule amendments that would establish an expedited process for BATS to suspend Members that violate the proposed rule prohibiting layering and spoofing. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 17, 2015. SEC Release No. 3475693.
Financial Industry Regulatory Authority
SEC Will Deliberate Further on Changes to ATS Transparency Rules
On August 13th, the SEC designated October 7, 2015, as the date by which it will either approve or deny FINRA’s proposal to publish, as part of the expansion of its alternative trading system (“ATS”) transparency initiative, the remaining equity volume executed overthecounter by FINRA members, including nonATS electronic trading systems and internalized trades. SEC Release No. 3475697.
FINRA Revises Series 4 Examination
On August 10th, FINRA announced that it will implement revisions to the Series 4 examination program, which serves as the qualifying exam for Registered Options Principals. The revisions include changes to the content outline to highlight the six major job functions performed by Registered Options Principals, adjustments to the number and weighting of questions assigned to each job function, and a greater emphasis on key tasks. The changes will be implemented in examinations administered on or after September 28, 2015. FINRA Regulatory Notice 1529.
FINRA Proposes Rules Governing Outside Accounts
On August 10th, the SEC announced that FINRA has proposed to adopt FINRA Rule 3210 (Accounts at Other BrokerDealers and Financial Institutions) as part of the development of its new consolidated rulebook. The new rule would, among other things, enable member firms to monitor the personal accounts opened or established outside of the firm by its associated persons and require associated persons to obtain consent before opening an account at another financial institution. Comments should be submitted on or before September 4, 2015. SEC Release No. 3475655.
ICE Clear Europe Limited
ICE Clear Europe Receives Green Light to Add Clearstream Banking as a Triparty Collateral Service Provider
On August 13th, the SEC approved ICE Clear Europe Limited’s (“ICE Clear Europe”) proposal to amend its Finance Procedures in order to allow Clearstream Banking to act as a triparty collateral service provider for initial or original margin in respect of any product category, including the CDS product category. SEC Release No. 34 75692.
Municipal Securities Rulemaking Board
MSRB to Revise Qualification Examinations
On August 7th, the SEC requested comment on the MSRB’s proposed rule change that would revise the content outlines for the Municipal Fund Securities Limited Principal (Series 51), Municipal Securities Representative (Series 52), and Municipal Securities Principal (Series 53) Qualification Examinations. Comments should be submitted on or before September 3, 2015. SEC Release No. 3475646.
New York Stock Exchange LLC
SEC Extends Period to Consider Changes to NYSE’s Regulatory Oversight Committee Amendment
On August 11th, the SEC designated September 28, 2015, as the date by which it will either approve or disapprove the New York Stock Exchange LLC’s proposed amendment to its Eighth Amended and Restated Operating Agreement, which would establish a Regulatory Oversight Committee as a Committee of the Board of Directors of the Exchange as well as make other conforming amendments to Exchange Rules. SEC Release No.3475659.
Options Clearing Corporation
OCC Pulls Proposed Change to Clearing Fund Size Adjustment
On August 10th, The Options Clearing Corporation (“OCC”) withdrew its proposed change to Rule 1001(a), which would have allowed it to adjust the size of its clearing fund on an intramonth basis. SEC Release No. 34 75658.
Court Rejects Fund’s Request to Review SEC Order to Change Its Tax Accounting Procedures
On August 11th, the D.C. Circuit affirmed a SEC order denying a request for an exemption. The SEC denied the request of openend mutual fund Copley Fund Inc. for an exemption from the SEC rule that Copley must calculate and report its deferred tax liability based on the amount of tax it would owe if its entire stock portfolio were liquidated. The D.C. Circuit denied Copley’s petition for review, agreeing with the SEC that granting the exemption would run counter to the Investment Company Act of 1940, which requires that a redemption price based on “net asset value” be calculated to eliminate or reduce any unfair “dilution of the value” of shares held by nonredeeming shareholders.
Sen. Elizabeth Warren Is Wary of Wall Street Messaging Service
On August 12th, CFO.com reported that U.S. Senator Elizabeth Warren of Massachusetts expressed her concern as to whether financial firms could use a new instantmessaging system to protect themselves from regulatory scrutiny. In a letter to the SEC and five other agencies, Sen. Warren wrote that the developer of the system, Symphony Communications LLC, has described it as a way to “prevent government spying” with “no backdoors.” Symphony denied that its service, which is meant to allow employees to trade messages instantly and securely, could be used to evade compliance. Messaging Service.
Paper Industry Campaigning SEC to Continue Using Paper for Dividend Statements
On August 10th, The Boston Globe reported that the paper industry is trying to convince the SEC that it should not switch to the Internet for mutual fund deliveries. The paper industry commented that the SEC’s Proposed Rule 30e3 “would impede access for many investors, especially the elderly, those with disabilities, and minority Americans – all demographics that are less likely to have regular Internet access.”
BATS Global Markets Gets Regulatory Approval to Open Its Second U.S. Options Exchange
On August 10th, Reuters reported that Kansas Citybased exchange operator BATS Global Markets has received regulatory approval to open EDGX Options, its second U.S. options exchange, set to be launched on November 2nd. Incoming options orders will be sorted by price, and if there are two or more orders at the best price, trades will be allocated proportionally according to size.
Survey Says: Financial Services Social MediaHosted Email Accounts Are Risky
On August 10th, Reuters reported on the risks involved with social media in the financial services sector. A survey, conducted by the U.S. Investment Adviser Association, ACA Compliance Group, and OMAM, found that there are risks involved in social mediahosted email accounts used by financial advisers. Advisers, who have no official guidance from the SEC on social media rules, currently rely only on guidance obtained from conferences and regulatory notices from FINRA. Social Media.
New York City’s ‘Responsible Banking’ Law Is Unconstitutional
On August 10th, Reuters summarized a U.S. federal judge’s ruling that New York City’s “responsible banking” law, which called for banks holding the city’s over $6 billion in deposits to document how well they meet the needs of lowincome neighborhoods, is unconstitutional. The judge found that the 2012 law illegally conflicts with both federal and state statutes that regulate banks.
Amidst Criticism, SEC Pursues HighProfile Insider Trading Cases
On August 7th, The New York Times reported that the SEC has been increasing enforcement by quietly pursuing several highprofile insider trading cases that could enable it to redefine its regulatory role and regain momentum. This comes as the SEC had recently been called out for focusing only on minor cases, not being aggressive enough in pursing Wall Street banks, and being too aggressive in seeking an unfair advantage for trying cases by using administrative courts where SECappointed judges hear cases.
Senator Proposes Extending Statute of Limitations on Securities Law Violators
On August 7th, InvestmentNews reported that Senator Jack Reed of Rhode Island introduced a bill that would extend the statute of limitations for the SEC to seek civil monetary penalties from five to 10 years. This proposed legislation was brought in response to a unanimous 2013 U.S. Supreme Court decision, Gabelli v. SEC, which held that the current fiveyear time limit for the SEC to bring charges begins when the violation occurs, not when it is discovered by the agency. Senator Reed asserted that Gabelli could leave investors vulnerable to financial fraud involving increasingly complex investment products and elaborate transactions that can be hidden from regulators for years.