Insights from Winston & Strawn

On July 13, 2016, the Securities and Exchange Commission (“SEC”) adopted recent amendments to update its rules regarding administrative proceedings.  The amendments were adopted, in part, to address the concern that the SEC’s use of its own administrative courts to litigate cases were unfair for defendants, as the rules governing the SEC’s administrative proceedings lacked the legal protections available to defendants in federal court.    

The amendments provide parties with additional rights to engage in depositions and make the timelines for administrative proceedings more flexible.  According to the SEC’s press release (which can be found here), the amendments would:

  • increase the potential duration of the prehearing period from 4 months to a maximum of 10 months (for the cases designated for the longest timelines),
  • permit parties in the cases designated for the longest timelines to notice up to 3 depositions per side in single-respondent cases and up to 5 depositions per side in multi-respondent cases, and to request up to 2 additional depositions,
  • elaborate on the forms of dispositive motions that may be filed at various stages of the legal proceedings, as well as the applicable procedures and legal standards for the motions, and
  • make additional clarifying and conforming changes to other rules, such as rules pertaining to the admissibility of certain types of evidence, expert disclosures and reports, the requirements for the contents of an answer, and procedures for appeals.

According to the SEC, in 2015, administrative law judges issued 207 initial decisions, held 27 hearings, and ordered civil penalties of almost $21 million and disgorgement of more than $12 million.

The final rule will take effect 60 days after being published in the Federal Register.

Feature: SEC Proposes New Disclosure Requirements for Broker-Dealers on the Handling of Institutional Orders

At its July 13th Open Meeting, the Securities and Exchange Commission (“SEC”) voted to propose new rules that would require broker-dealers to make additional disclosures about their handling of customer orders. The proposed rules would impose new disclosure requirements regarding the handling of institutional orders as well as expand the information included in current retail order disclosures.

Under the proposal, broker-dealers would be required to provide standardized information to customers, upon request, about their institutional order handling and execution quality. The required disclosure would contain specified monthly data for the previous six months, including the number of shares sent to the broker-dealer, shares executed by the broker-dealer as principal, and institutional orders exposed by the broker-dealer through actionable indications of interest. The disclosure would also contain specific information about the venues to which the broker-dealer routed institutional orders, including information on order execution, order routing, and orders that provided or removed liquidity. In addition to the customer-specific reports, broker-dealers would also be required to produce aggregated reports of their handling of institutional orders, which would be made publicly available each quarter and maintained online for three years.

The additional retail order routing disclosures, among other things, would require broker-dealers to separately report limit orders as marketable and non-marketable; report routing information by calendar month rather than quarterly; and describe the terms of any payment for order flow and any profit-sharing arrangements that may influence their routing decisions. Broker-dealers would also have to provide additional information about the venues handling the largest number, or more than five percent, of their non-directed orders, including the net aggregate amount of any payment for order flow received, transaction fees paid per share, and transaction rebates received. The rules would require the information to be made publicly available online for three years.SEC Press Release.

In supporting the rules, SEC Chair Mary Jo White noted that the proposed rules would “bring more transparency to order handling and bring disclosures into line with modern technology and market practice.” SEC Commissioners Michael Piwowar and Kara Stein also supported the proposal. Commissioner Piwowar maintained that the additional disclosures would “promote competition for better execution quality” while Commissioner Stein emphasized the benefit to investors, who would receive “better and more accessible information about how their orders interact today in a widely dispersed marketplace.” As the Wall Street Journal points out, the proposal targets conflicts of interest in its focus on the fill rates of mutual funds and on the rebates received by brokers under the “maker taker” system. The proposal also illustrates the SEC’s continued emphasis on bringing transparency to trading venues and its focus on equity market structure in the wake of the 2010 “Flash Crash.”

Broker-dealers also stand to benefit from the proposed rules, which would introduce consistency in the disclosures they make about the handling of institutional orders. Currently, the level of detail about order handling requested by customers and provided by broker-dealers can vary widely. As it noted in its proposing release, the SEC believes that “standardizing the baseline information provided by broker-dealers could help ensure the wide availability of meaningful order handling information that may be produced in an efficient and cost-effective manner.” A market structure analyst cited by Reuters said that in the absence of standardized disclosures for institutional orders, brokers must currently work “really, really hard to provide this information.”

The SEC will accept public comments on the proposed rules, which should be submitted within 60 days of publication in the Federal Register.

Banking Agency Developments


Agencies Release Final Revisions to Interagency Q&A Regarding Community Reinvestment

On July 15th, the Office of the Comptroller of the Currency (“OCC”) announced that the federal bank regulatory agencies with responsibility for Community Reinvestment Act (“CRA”) rulemaking published final revisions to “Interagency Questions and Answers Regarding Community Reinvestment,” which provides additional guidance to financial institutions and the public on the agencies’ CRA regulations.

OCC to Host Mutual Savings Association Advisory Committee Meeting

On July 13th, the OCC announced that it will host a public meeting of the Mutual Savings Association Advisory Committee on August 3, 2016, beginning at 1:00 p.m. Eastern Daylight Time. The meeting will be held at the OCC office, 400 7th Street, SW, Washington, DC 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.

OCC Hosting Risk Governance, Credit Workshops in Kansas City

On July 13th, the OCC announced that it will be hosting two workshops in Kansas City, Missouri, at the Westin Kansas City at Crown Center, August 16-17, for directors of national community banks and federal savings associations supervised by the OCC. The Risk Governance workshop will be held on August 16th and the Credit Risk workshop will be held on August 17th.

OCC Report Examines Risks Facing National Banks and Federal Savings Associations

On July 11th, the OCC reported that strategic, credit, operational, and compliance risks remain top concerns in its Semiannual Risk Perspective for Spring 2016.


CFPB Director Delivers Speech on National Financial Capability Study Release

On July 12th, Consumer Financial Protection Bureau (“CFPB”) Director Richard Cordray delivered a speech on the FINRA Foundation National Financial Capability Study release.

Treasury Department Developments

Treasury Department

Deputy Secretary Delivers Speech on National Financial Capability Study Release

On July 12th, Treasury Department Deputy Secretary Sarah Bloom Raskin delivered a speech on the FINRA Foundation National Financial Capability Study release.

Securities and Exchange Commission

Final Rules

SEC Adopts Rules and Guidance Related to Security-Based Swap Transaction Reporting

On July 13th, the SEC approved final rules and guidance related to the reporting and public dissemination of security-based swap transaction data. The final rules, known as Regulation SBSR, establish regulatory reporting and public dissemination requirements for certain cross border security-based swaps, prohibit registered swap data repositories (“SDRs”) from imposing fees or usage restrictions on the security-based swap data that they are required to disseminate under Regulation SBSR, and assign the reporting duties for platform-executed security-based swaps that will be submitted to clearing and for security-based swaps resulting from the clearing process. The rules also establish a new compliance schedule for certain portions of Regulation SBSR, which will be phased in over a period of months. The final rules will be effective 60 days after publication in the Federal Register. SEC Press Release. The SEC voted unanimously in favor of adopting the final rules, although Commissioners Piwowar and Stein expressed frustration that the SEC has failed to finalize all of the rules for security-based swaps mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. See also remarks by Chair White.

SEC Approves Changes to Rules of Practice for Administrative Proceedings

The SEC voted on July 13th to adopt amendments to its Rules of Practice regarding administrative proceedings. Among other things, the amendments extend the potential length of the prehearing period to a maximum of ten months; allow parties in cases with the longest timelines to notice three depositions per side in single-respondent cases and five per side in multi-respondent cases; clarify the types of dispositive motions that may be filed at certain stages of proceedings; and make additional clarifying and conforming changes to rules regarding admissibility of certain evidence, expert disclosures, and procedures for appeals. The amendments will become effective 60 days after publication in the Federal Register and will apply to all proceedings initiated on or after that date. In addition, the amended rules will apply to pending proceedings based on the phase of the proceeding. SEC Press Release.

Proposed Rules

SEC Proposes Amendments to Update and Simplify Disclosure Requirements

At its Open Meeting on July 13th, the SEC voted to propose amendments to update and simplify certain disclosure requirements due to changes in disclosure rules, accounting principles, and technology. The proposal, which is part of the SEC’s disclosure effectiveness review, eliminates requirements that are duplicative of, overlapping with, or encompassed by U.S. Generally Accepting Accounting Principles (“GAAP”), International Financial Reporting Standards (“IFRS”), or other Commission disclosure requirements. The proposed amendments would also cover disclosure requirements that are outdated or have been superseded by recent legislation or updates to GAAP or other Commission disclosures. Comments should be submitted within 60 days of publication in the Federal Register. In a statement, SEC Commissioner Kara Stein reluctantly supported the proposal, but expressed concern that the highly technical presentation of the release may limit the public’s ability to comment on the proposal. See also statements by Chair White and Commissioner Piwowar. The SEC published a demonstration version of the proposed amendments to assist commenters in understanding the proposed changes. SEC Press Release.


SEC Publishes New Guidance on the Filing of Schedules 13D and 13G

The SEC’s Division of Corporation Finance published a new Compliance and Disclosure Interpretation (“C&DI”) on July 14th regarding the filing of Schedules 13D and 13G under Regulation 13D-G beneficial ownership reporting requirements. The new C&DI addresses the impact of an acquiror’s disqualification from relying on an exemption from the Hart-Scott-Rodino Act’s notification and waiting provisions due to efforts to influence an issuer’s business decisions on the acquiror’s ability to report beneficial ownership on Schedule 13G. SEC C&DI103.11.

Corporation Finance Offers Guidance on Required Representations for “Exxon Capital” Exchange Offers

On July 11th, the SEC’s Division of Corporation Finance updated its C&DIs on Securities Act Section 2(a)(11) and Securities Act Form S-4 to include new questions relating to the representations that issuers must make about the absence of a distribution of securities received in an “Exxon Capital” exchange offer. The staff explained that the required representations do not need to follow any particular form as long as they address certain essential matters, including, among other things, assurances that the issuer has not entered into agreements that would cause the securities to be distributed following the completion of the exchange offer. SEC C&DIs 125.13 and 111.02.

Speeches and Statements

Piwowar Urges SEC to Pursue Rulemaking to Shorten Trade Settlement Cycle

In a statement issued on July 8th, SEC Commissioner Michael S. Piwowar expressed his frustration at the SEC’s failure to propose a rule to shorten the trade settlement cycle from three business days after a trade is executed to two business days. Noting that the agency had specified a June 2016 action date for issuing a proposal, Piwowar called the delay “wholly unacceptable.” Piwowar Statement.

Other Developments

Equity Market Structure Advisory Committee Meeting

The SEC’s Equity Market Structure Advisory Committee will hold a public meeting on August 2, 2016. Written statements to the Committee should be submitted on or before July 27, 2016. SEC Release No. 34-78308.

SEC Announces Agenda for Advisory Committee on Small and Emerging Companies Meeting

On July 14th, the SEC announced the agenda for the upcoming meeting of its Advisory Committee on Small and Emerging Companies, which will take place on July 19, 2016. At the meeting, the Committee will discuss the first year of Regulation A+, recommendations related to the definition of an “accredited investor,” and the Commission’s recent proposal to amend the definition of “smaller reporting company.” Public comments on these topics may be submitted to the Committee in advance of the meeting. SEC Press Release.

Investor Advisory Committee Meeting

The SEC’s Investor Advisory Committee met on July 14th to discuss sustainability reporting and investment company reporting modernization. Earlier in the week, the SEC announced the appointment of three new members of the Committee, as well as the reappointment of five members whose terms recently expired. In an opening address, SEC Chair Mary Jo White updated the Committee regarding recent SEC rulemaking activity, including final rules on reporting requirements for security-based swaps and proposed rules to increase order routing transparency for institutional and retail investors. See also Commissioner Piwowar’s statement.

OCIE Launches Share Class Initiative

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published a Risk Alert on July 13th announcing its 2016 Share Class Initiative. As part of the Initiative, OCIE staff will conduct risk-based examinations to identify conflicts of interest tied to advisers’ compensation or financial incentives for recommending mutual fund and 529 Plan share classes that have substantial loads or distribution fees. The examinations will focus on advisers’ practices related to share class recommendations in high-risk areas, including fiduciary duty and best execution; disclosure; and compliance policies and procedures. OCIE Risk Alert.

EDGAR Updates

On July 8th, the SEC published the draft EDGAR Form N-MFP2 XML Technical Specification (Version 1). The proposed changes in the draft, if approved by the SEC, will take effect on October 14, 2016.

Staff Announcements

The SEC announced on July 8th that Sean McKessy, Chief of the SEC’s Office of the Whistleblower, will depart the agency later this month. Jane Norberg, who currently serves as the Whistleblower Office’s Deputy Chief, will be appointed Acting Chief following McKessy’s departure. SEC Press Release.

SEC Approves PCAOB’s Amended Audit Inspection Rules

On July 11th, the SEC approved the Public Company Accounting Oversight Board’s (“PCAOB”) proposed amendments to its rules governing the frequency of audit inspections. Among other things, the amended rules replace the triennial inspection requirement for registered public accounting firms that play a substantial role in an audit but do not issue audit reports with a requirement for the PCAOB to inspect five percent of these firms on an annual basis. The rules also allow the PCAOB to forego an inspection, on a case by case basis, for a firm that does not issue an audit report for two consecutive years. SEC Release No. 34-78289.

Commodity Futures Trading Commission

Staff Approves Public Comment Extension for Rule Amendment Certification Filing by ICE Futures U.S

On July 13th, the Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight announced that it has granted ICE Futures U.S. a 15-day extension of the public comment period and a 45-day extension of the stay period for Submission No. 16-67, dated June 1, 2016. ICE Futures U.S. had requested both extensions. Comments must be submitted on or before July 29, 2016. The extended stay will expire on October 28, 2016. The original public comment period was scheduled to expire on July 14, 2016 and the stay on September 13, 2016. Under the rule amendment certification, ICE Futures U.S. would clarify that parties to a block trade may engage in pre-hedging or anticipatory hedging of the position they believe in good faith will result from the consummation of the block trade, except for an intermediary that takes the opposite side of its own customer order.

Federal Rules Effective Dates

Click here to view table.

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

CFE Proposes Changes to Rules on Account and Order Ticket Information.

On July 7th, the SEC requested comments on a proposed rule change filed by CBOE Futures Exchange, LLC (“CFE”) to amend its rules related to account and order ticket information in an effort to clarify information that must be included as part of an order. Comments should be submitted on or before August 3, 2016. SEC Release No. 34-78248.

Financial Industry Regulatory Authority

FINRA Announces Changes to Certain Electronic Blue Sheet Data Elements.

The Financial Industry Regulatory Authority (“FINRA”) published a Regulatory Notice on July 14th that announces modifications by FINRA and other members of the Intermarket Surveillance Group (“ISG”) to certain equity and option data elements for Electronic Blue Sheets (“EBS”). The changes, which will become effective on December 30, 2016, alter certain equity data elements to be consistent with NYSE Regulation Information Memorandum 16-2 and NYSE Arca Equities Regulatory Bulletin 16-39. FINRA and the other ISG members will also modify certain data elements in light of the SEC’s approval of Investors Exchange, LLC’s application to register as a national securities exchange. FINRA Regulatory Notice 16-24.

International Swaps and Derivatives Association

ISDA Publishes New Protocol to Assist in Compliance with BRRD Article 55 Requirements.

On July 14th, the International Swaps and Derivatives Association (“ISDA”) published the ISDA 2016 Bail-in Article 55 BRRD Protocol. The Protocol is designed to assist certain European entities in complying with requirements under the Bank Recovery and Resolution Directive (“BRRD”) to include a contractual term in agreements creating any relevant liability and governed by the law of a third country to ensure their creditors agree to recognize any bail-in of those liabilities. ISDA Press Release.

Municipal Securities Rulemaking Board

MSRB Proposes New RTRS Academic Data Product

On July 14th, the SEC requested comments on a proposal filed by the Municipal Securities Rulemaking Board (“MSRB”) to establish an historical data product to provide institutions of higher education with post-trade municipal securities transaction data collected through its Real-Time Transaction Reporting System (“RTRS”) that would include anonymized dealer identifiers. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of July 18, 2016. SEC Release No. 34-78323.


SEC Seeks Comments on NASDAQ Exchanges’ Proposed Limit Order Protection Rules.

On July 7th, the SEC provided notice of The Nasdaq Stock Market LLC’s (“Nasdaq”), NASDAQ PHLX LLC’s(“Phlx”), and NASDAQ BX, Inc.’s (“BX”) separately filed proposals to amend their respective rules to adopt a Limit Order Protection (“LOP”) to address the risks to market participants of human error in entering Limit Orders at unintended prices. The proposed LOPs would prevent certain Limit Orders from executing or being placed on the Order Book at prices outside pre-set standard limits. Comments should be submitted on or before August 3, 2016.


SEC Grants Accelerated Approval to NYSE Exchanges’ Proposed Amendments to Process for Opening Trading in an Options Series

On July 11th, the SEC requested comments on NYSE Arca, Inc.’s (“NYSE Arca”) and NYSE MKT LLC’s (“NYSE MKT”) amendments to their separately filed proposals to amend their respective rules regarding the process for opening trading in an option series. The amendments clarify and explain how the exchanges would determine the opening price upon dissemination of a National Best Bid and Offer (“NBBO”) from the Options Price Reporting Authority (“OPRA”). Comments on the amendments should be submitted on or before August 5, 2016. The SEC also issued an order approving the proposed rule changes on an accelerated basis.

NYSE Proposes Rule Changes Related to New Pillar Trading Platform

On July 8th, the SEC requested comments on the New York Stock Exchange LLC’s (“NYSE”) proposal to allow NYSE to trade pursuant to unlisted trading privileges (“UTP”) for any NMS Stock listed on another national securities exchange; establish listing and trading requirements for exchange-traded products; and adopt new equity trading rules relating to trading halts of securities traded pursuant to UTP on the Pillar platform. Comments should be submitted on or before August 4, 2016. SEC Release No. 34-78263.

SEC Institutes Proceedings to Determine Whether to Approve or Disapprove NYSE Arca’s Proposed Changes to the Clearing Member Requirement for Entering an Order into the Electronic Order Capture System

On July 7th, the SEC instituted disapproval proceedings regarding NYSE Arca’s proposal to amend its rules to allow an Options Trading Permit (“OTP”) holder to record the name of the clearing member in the Electronic Order Capture system “as the events occur and/or during trade reporting procedures” rather than prior to representation of the order in the trading crowd. Comments should be submitted on or before August 3, 2016. Rebuttal comments are due on or before August 17, 2016. SEC Release No. 34-78239.

Judicial Developments

Ninth Circuit Revives Facebook Securities Fraud Suit Against Law Firm Venable

ESG Capital Partners, a group of investors formed to purchase pre-IPO Facebook shares, brought a  securities fraud action against law firm Venable LLP, claiming that Venable and former partner David Meyer helped their client steal $11.25 million in connection with the IPO. A district court partly dismissed the suit for lack of evidence that defendants knew their client was assuming a false identity so ESG would pay him for shares he knew he could not acquire. The Ninth Circuit partly reversed on July 11th, determining that the claim adequately alleged a connection between the law firm and the scheme. ESG.

Industry News

First Person Convicted of Spoofing Is Sentenced to Three Years in Prison

On July 13th, Bloomberg reported that trader Michael Coscia, the first person tried and convicted under a Dodd-Frank provision that made it illegal to manipulate prices by placing orders without intending to execute them, has been sentenced to three years in prison by a Chicago federal judge.