Insights from Winston & Strawn

On March 25, the Securities and Exchange Commission (“SEC”) adopted final amendments to Regulation A and other rules and forms, as required by Title IV of the Jumpstart Our Business Startups Act.

Among the adopted amendments are revisions to Rule 262 of Regulation A that further conform the “bad actor” disqualification provisions of Regulation A to the equivalent provisions of Rule 506(d), as required pursuant to Section 3(b)(2)(G) of the Securities Act of 1933, which invited the SEC to consider implementing bad actor disqualification provisions substantially similar to those adopted in furtherance of Section 926 of the Dodd­Frank Act.

Following the amendments, the persons covered by the final Rule 262 are substantially the same as the covered persons included in Rule 506(d), and include “any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power.” In adopting the final Rule 262, the SEC took the opportunity to bring some much needed clarity to the interpretation of the phrase “voting equity securities” as used in both Rule 262 and Rule 506(d).

In the original adopting release for Rule 506(d), the SEC declined to expressly define “voting equity securities,” but rather indicated that securities would be voting equity securities if “security holders have or share the ability, either currently or on a contingent basis, to control or significantly influence the management and policies of the issuer through the exercise of a voting right.” However, amid concerns that their initial interpretation was overbroad, the SEC has reconsidered this position.

The SEC will now interpret the term “voting equity securities” in a manner consistent with the definition of “voting securities” in Rule 405 of the Securities Act. Accordingly, “voting equity securities” for purposes of the bad actor disqualification provisions of Regulation A and Regulation D will include only securities the holders of which are presently entitled to vote for the election of directors, whether or not the shareholder has control or significant influence over the management or policies of the issuer.

In the announcing its revised interpretation, the SEC seems hopeful that a “bright­line” standard for defining “voting equity securities” will bring about an added degree of workability and certainty that facilitates compliance by issuers that seek to rely on Regulation A or Regulation D to conduct exempt offerings.

The amendments and final rules can be found in the SEC’s full adopting release (No. 33­9741), and the discussion of the SEC’s revised interpretation of “voting equity securities” can be found beginning on page 199 of the adopting release.

J. Wade Challacombe

Repos and Securities Lending

Last Thursday, the Treasury Department’s Office of Financial Research (“OFR”) published “Repo and Securities Lending: Improving Transparency with Better Data,” which discusses data gaps in the information known about the U.S. repurchase agreement (“repo”) and securities lending markets. The paper opens with an overview of the repo and securities lending markets, discussing the markets’ size, participants, and mechanics. It notes that although data concerning an individual participant’s activities is available, comprehensive market coverage is not. Moreover, the data that does exist is highly aggregated and focused on quantity. It fails to include information on rates, haircuts, or counterparty exposure. The absence of common reporting standards and a common data repository further complicates efforts to fully comprehend the scope of the markets.

The OFR’s efforts to remedy these shortcomings include promoting of the use of Legal Entity Identifiers and a data collection pilot of bilateral repo and securities lending transactions conducted jointly by the OFR and the Federal Reserve. The pilot task force has identified areas in which additional information is needed. These areas include market participant dependence on short­term funding, counterparty exposure, interconnections among participants, collateral quality, and diversification. With respect to securities lending, the pilot task force seeks data on terms and collateral uses.

The OFR’s paper further notes that the Dodd­Frank Act directed the SEC to adopt rules to increase the transparency of information available to brokers, dealers, and investors about securities lending. However, despite having a two­year deadline for doing so, the SEC has yet to issue a proposed rule.

But while the SEC has not proposed any data collection rules, the Financial Stability Board (“FSB”) has. The FSB’s proposal defines the data elements for repos, securities lending and margin lending that national and regional authorities will be asked to report as aggregates to the FSB. Six recommendations to national and regional authorities are included in the proposal. They include monthly reporting, the collection of highly representative data, and the segregation of local data. The comment period for the FSB’s proposal expired in February; the Board intends to issue final standards by the end of the year.

Last month, the European Banking Authority (“EBA”) published proposed criteria that would establish limits on E.U. institutions' exposures to shadow banking entities. The EBA’s professed aim is to ensure “that institutions have sufficient information about their counterparties in the shadow banking sector, so they can make informed decisions about their exposures to the sector in general, as well as to individual shadow banking entities.” The proposal also seeks to capture “entities that are not subject to appropriate and sufficiently robust prudential supervision and therefore pose the greatest risks.” Comments on the EBA’s proposed criteria should be submitted on or before June 19, 2015.

Banking Agency Developments

OCC Workshops

The Office of the Comptroller of the Currency (“OCC”) will host two workshops in Detroit, Michigan on June 2­3, 2015 for directors of national community banks and federal savings associations. The Risk Governance workshop on June 2 combines lectures, discussions, and exercises to provide practical information for directors to effectively measure and manage risks. The workshop also focuses on the OCC’s approach to risk­based supervision and major risks in the financial industry. Revised and updated for 2015, the Credit Risk workshop on June 3 focuses on credit risk within loan portfolios, such as identifying trends and recognizing problems. The workshop also covers the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change. OCC Press Release.

FDIC Revises Rules Concerning Asset Sales of Failed Institutions

On April 24th, the Federal Deposit Insurance Corporation (“FDIC”) extended restrictions on sales of assets of a failed institution to individuals or entities who are also prohibited from purchasing assets of a covered financial company from the FDIC. 80 FR 22886.

FDIC Seeks Comment on Possible New Standards for Banks with Large Number of Deposits

On April 21st, the FDIC published an advanced notice of proposed rulemaking (“ANPR”) on potential new recordkeeping standards for a limited number of FDIC­insured institutions with a large number of deposit accounts. The suggested threshold for the new standard would be for banks with more than 2 million deposit accounts. The possible new standards would not apply to community banks. The ANPR also seeks comment on what types of new data requirements would assist in making a rapid and efficient insurance determination process. Comments should be submitted within 90 days after publication in the Federal Register, which is expected during the week of April 27. FDIC Press Release.

FDIC Seeks Applicants for Youth Savings Pilot

On April 20th, the FDIC requested applications from institutions for its Youth Savings Pilot, a program designed to foster financial education through the opening of safe, low­cost savings accounts by school­age children. Nine financial institutions are currently participating with schools across the country as part of the initial phase of the FDIC's Youth Savings Pilot. Several of the banks oversee in­school bank branches that encourage students to open and manage savings accounts at school. The banks also promote financial education instruction. In some cases, that instruction is being led by other students whom the bank has trained and equipped to deliver lessons to their peers. FDIC Press Release.

The Large Institution Supervision Coordinating Committee Supervisory Program

On April 17th, the Federal Reserve Board released additional information on the operating structure of the Large Institution Supervision Coordinating Committee (“LISCC”) supervisory program. The LISCC oversees and supervises the largest, most systemically important financial institutions. The program evaluates both the safety and soundness of individual large financial institutions and the risks posed by those institutions to the broader financial system. Federal Reserve Board Press Release.

Treasury Department Developments

FinCEN Targets Trade­Based Money Laundering in Miami

On April 21st, the Financial Crimes Enforcement Network (“FinCEN”) issued a Geographic Targeting Order (“GTO”) to about 700 Miami businesses to shed light on cash transactions that may be tied to trade­based money laundering schemes. The GTO, which was issued to electronics exporters located near Miami, Florida, will be in effect for 180 days beginning on April 28, 2015. It lowers the $10,000 reporting threshold to $3,000 for covered businesses. These businesses are required to report to FinCEN currency transactions over $3,000, and to include in those reports information about the transaction and the persons involved. Each business covered under this GTO has received notice of its obligations via personal service or by certified mail. Failure to comply could result in substantial criminal and civil penalties. FinCEN Press Release.

Securities and Exchange Commission


Money Market Reforms

On April 22nd, the Division of Investment Management published guidance regarding the money market reforms the SEC adopted in July 2014. Division staff issued two documents which present the guidance in the form of answers to frequently asked questions and answers. Among other things, “2014 Money Market Fund Reform Frequently Asked Questions” addresses issues related to Forms N­MFP, N­CR, and N­1A; amortized cost guidance; retail money market funds; insurance separate accounts; fees and gates; Treasury and government money market funds; transitions and reorganizations; asset­backed securities; and redemptions. Specific guidance regarding valuations under the 2014 money market fund reforms was also provided ins a separate document.

OCIE Risk Alert on Never Before Examined Investment Companies

On April 20th, the Office of Compliance Inspections and Examinations issued a Risk Alert concerning its initiative to examine SEC­registered investment company complexes that have not previously been examined. During the examinations, staff intend to focus on compliance programs; annual contract review; advertising and distribution of fund shares; valuation of portfolio assets and net asset value calculations; and leverage and use of derivatives.

Other Developments

Executive Compensation Disclosure Rules

On April 24th, Compliance Week reported the SEC will likely vote on April 29, 2015 to propose for public comment new executive compensation disclosure rules. Compensation Disclosure.

Commissioner Piwowar Addresses Fixed Income Conference

On April 21st, Commissioner Michael S. Piwowar discussed the challenges facing the fixed income markets, possible solutions and potential consequences. The challenges not only include concern over whether sufficient liquidity exists, but also identifying what a baseline measure of liquidity should be and understanding how, and to what extent, regulatory actions affected liquidity. Piwowar Remarks.

Shareholder Proposal to Closed­End Fund Isn’t Too Vague

On April 17th, the Division of Investment Management posted its April 16, 2015 response to Clough Global Equity Fund’s request for no­action relief if the Fund excluded a shareholder proposal submitted by Opportunity Partners L.P. from the Fund’s 2015 annual meeting. Opportunity Partners proposes the liquidation of the Fund or its conversion into an exchange­traded fund. The Fund argues that the proposal may be excluded pursuant to Rule 14a­8(i)(6), because in the event more than 50 percent of the fund's common shares are submitted for tender, implementation of the proposal would result in an action in contravention of the fund's governing instrument; pursuant to Rule 14a­8(i)(2), because the implementation of the proposal would violate the Investment Company Act of 1940; and pursuant to Rule 14a­8(i)(3), because the proposal is inherently vague and indefinite. While the Division found that there appears to be some basis for the view that the proposal may be excluded under Rules 14a­8(i)(2) and 14a­8(i)(6), those defects could be cured if the proposal were revised to state that the fund’s board should take the steps necessary to liquidate or convert the fund. However, the Division disagreed with the belief that the proposal is so inherently vague that it could be excluded under Rule 14a­8(i)(3).

Equity Market Structure Advisory Committee to Meet

The SEC announced that its Equity Market Structure Advisory Committee will meet on May 13, 2015. The meeting will focus on Rule 611 of SEC Regulation NMS, known as the “Order Protection Rule” or “Trade­through Rule.” Rule 611 requires trading centers to have policies and procedures designed to prevent “trade throughs,” trades at prices that are inferior to displayed and immediately accessible quotations at other trading centers. SEC Press Release.

Staff Announcements

The SEC announced that David Woodcock, Regional Director of the Fort Worth office and leader of the Enforcement Division’s nationwide Financial Reporting and Audit Task Force, is leaving the SEC later this spring. Associate Regional Directors Marshall Gandy, who oversees the office’s examination program, and David Peavler, who oversees its enforcement program, will serve as co­acting Regional Directors upon Mr.

Woodcock’s departure.

Commodity Futures Trading Commission

SEF Guidance on the Calculation of Projected Operating Costs

On April 23rd, the Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight issued guidance to swap execution facilities (“SEF”) regarding the calculation of projected operating costs for purposes of complying with the financial resource requirements under SEF Core Principle 13 and CFTC Regulation 13.1303. The guidance notes that one cost incurred by voice­based SEFs ­ the variable commissions such SEFs might pay their employee­brokers, calculated as a percentage of transaction revenue generated by the voice­ based SEF ­ is, unlike fixed salaries or compensation, an expense not payable unless and until revenue is collected by the SEF. The guidance provides that these variable commissions do not have to be included in a SEF’s calculation of projected operating costs. In contrast to variable commissions, any fixed salaries or compensation payable to employee­brokers of the SEF must be included in the calculation of projected operating expenses. CFTC Press Release.

Erroneous Trade Reporting Relief

On April 22nd, the Division of Market Oversight and Division of Clearing and Risk issued a no­action letter providing time­limited relief to SEFs and designated contract markets (“DCM”) to allow trades voided as a result of clerical or operational errors or errors discovered after a trade has been cleared to be corrected (“Error­Trade No­Action Letter”). The relief permits SEFs and DCMs to correct clerical or operational errors that cause a swap to be rejected for clearing and thus become void ab initio; and the relief allows counterparties to resubmit the trade with the correct terms. The Error Trade No­Action Letter also permits SEFs and DCMs to correct clerical or operational errors discovered after a swap has been cleared. The relief will expire at 11:59 PM (EDT) on June 15, 2016. Separately, the Division of Market Oversight issued a no­action letter providing relief to SEFs from certain requirements concerning trade confirmations required from SEFs for non­cleared swaps (“Confirmation No­Action Letter”). The Confirmation No­Action Letter extends previously issued relief to March 31, 2016, with certain modifications. The no­action letter provides relief to SEFs from the requirement to obtain documents that are incorporated by reference in a trade confirmation issued by a SEF, prior to issuing the confirmation, and from the requirement that a SEF maintain such documents as records. The letter also provides new relief from the requirement that a SEF report confirmation data contained in the documents that the SEF incorporates by reference in a confirmation. CFTC Press Release.

Civil and Criminal Fraud Charges Filed Against Flash Crash Trader

On April 21st, the CFTC announced the unsealing of a civil enforcement action against Nav Sarao Futures Limited PLC and Navinder Singh Sarao for unlawfully manipulating, attempting to manipulate, and spoofing with regard to the E­mini S&P 500 near month futures contract. The complaint had been filed under seal on April 17, 2015 and kept sealed until Sarao’s arrest by British authorities acting at the request of the U.S. Department of Justice, which has filed related criminal charges. The CFTC alleges that for over five years and as recently as April 6, 2015, defendants have used a variety of exceptionally large, aggressive, and persistent spoofing tactics. In particular, defendants modified a commonly used off­the­shelf trading platform to automatically simultaneously “layer” four to six exceptionally large sell orders into the visible E­mini S&P central limit order book, with each sell order one price level from the other. As the E­mini S&P futures price moved, the layering algorithm modified the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus, remaining visible to other traders, but staying safely away from the best asking price. Eventually, the vast majority of the layering algorithm orders were canceled without resulting in any transactions. Defendants were exceptionally active in the E­mini S&P on May 6, 2010, commonly known as the Flash Crash Day. The CFTC alleges defendants utilized the layering algorithm continuously for over two hours immediately prior to the precipitous drop in the E­mini S&P price, applying close to $200 million worth of persistent downward pressure on the E­mini S&P price, contributing to the market conditions that led to the Flash Crash. The CFTC further alleges defendants engaged in a variety of other manual spoofing techniques where defendants would place and quickly cancel large orders with no intention of the orders resulting in transactions. At times, this manual spoofing was used to exacerbate the price impact of the layering algorithm. CFTC Press Release. On April 22nd, Bloomberg discussed the regulatory lapses revealed by the charges against Sarao. Lapses. On April 23rd, Reuters summarized court documents which describe Sarao’s relationship with software companies, brokerage houses, and banks. Relationships.

Federal Rules Effective Dates

April 2015 ­ June 2015

Consumer Financial Protection Bureau

April 21, 2015            Homeownership Counseling Organizations Lists and High­Cost Mortgage Counseling Interpretive Rule. 80 FR 22091.

April 17, 2015            Submission of Credit Card Agreements Under the Truth in Lending Act (Regulation Z). 80 FR 21153.

Commodity Futures Trading Commission

May 26, 2015             Residual Interest Deadline for Futures Commission Merchants. 80 FR 15507.

Federal Housing Finance Agency

April 10, 2015            Federal Home Loan Bank Capital Stock and Capital Plans. 80 FR 12753.

Federal Reserve Board

May 15, 2015             Regulations Q, Y, and LL: Small Bank Holding Company Policy Statement; Capital Adequacy of Board­Regulated Institutions; Bank Holding Companies; Savings and Loan Holding Companies. 80 FR 20153.

Foreign Assets Control Office

April 13, 2015            Syrian Sanctions Regulations. 80 FR 19532.

Securities and Exchange Commission

June 19, 2015            Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A). 80 FR 21805.

June 15, 2015            Nationally Recognized Statistical Rating Organizations. 79 FR 55077.

[This rule is effective November 14, 2014; except the amendments to Sec. 240.17g­3(a) (7) and (b)(2) and Form NRSRO, which are effective on January 1, 2015; and the amendments to Sec. 240.17g­2(a)(9), (b)(13) through (15), Sec. 240.17g­5(a)(3)(iii)(E), (c)(6) through (8), Sec. 240.17g­7(a) and (b), and Form ABS­15G, which are effective June 15, 2015. The addition of Sec. Sec. 240.15Ga­2, 240.17g­8, 240.17g­9, 240.17g­ 10, and Form ABS Due Diligence­15E are effective June 15, 2015.]

May 18, 2015             Regulation SBSR­Reporting and Dissemination of Security­Based Swap Information. 80 FR 14563.

                                      Security­Based Swap Data Repository Registration, Duties, and Core Principles. 80 FR 14437.

April 20, 2015            Adoption of Updated EDGAR Filer Manual. 80 FR 21649.

Treasury Department

April 3, 2015              Department of the Treasury Acquisition Regulation; Technical Amendments. 80 FR 11595.

Exchanges and Self­Regulatory Organizations

Market Data Lawsuit

On April 20th, Reuters summarized the arguments made before a SEC Administrative Law Judge in the Securities Industry and Financial Markets Association’s lawsuit against NYSE Arca and NASDAQ OMX over the fees the exchanges charge for market data. Data Fees.

Chicago Board Options Exchange

Longer Period Designated to Consider Trading Floor Proposal

On April 22nd, the SEC designated June 8, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding the Chicago Board Options Exchange’s proposal relating to equipment and communication devices used on the Exchange’s trading floor. SEC Release No. 34­74786.


Longer Period Designated for Consideration of Order Type Amendments

On April 17th, the SEC designated June 8, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding EDGA Exchange’s and EDGX Exchange’s separately submitted proposals to amend their respective Rules 11.6, 11.8, 11.9, 11.10 and 11.11 to clarify and to include additional specificity regarding the current functionality of each of their exchange systems, including the operation of order types and order instructions.

Financial Industry Regulatory Authority

FINRA Helpline for Seniors.

On April 20th, the Financial Industry Regulatory Authority (“FINRA”) announced the launch of a toll­free securities helpline for seniors to provide older investors with a supportive place to get assistance from knowledgeable FINRA staff related to concerns they have with their brokerage accounts and investments. FINRA Press Release


Longer Period Designated for Proposed New Solicitation Mechanism

On April 16th, the SEC designated June 28, 2015 as the date by which it will approve or disapprove NASDAQ OMX PHLX’s amended proposed rule change to adopt new Rule 1081, Solicitation Mechanism, to introduce a new electronic solicitation mechanism pursuant to which a member would be able to electronically submit all­or­ none orders of 500 contracts or more (or, in the case of mini options, 5000 contracts or more) that the member represents as agent against contra orders that the member solicited. SEC Release No. 34­74746.


Longer Period Designated to Consider Managed Fund Shares Proposal

On April 17th, the SEC designated June 8, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE Arca’s proposed rule change to adopt generic listing standards for Managed Fund Shares. SEC Release No. 34­74755.

Judicial Developments

SLUSA’s Preclusion Is Closely Parsed

On April 23rd, the Second Circuit closely examined the parameters of the Securities Litigation Uniform Standards Act (“SLUSA”) to conclude that at least a portion of plaintiffs’ claims should be reinstated. Plaintiffs, investors in off­shore Madoff feeder funds, brought state common law claims against persons and entities associated with the off­shore funds for losses incurred as a result of the Madoff fraud. The district court dismissed plaintiffs’ suit in its entirety as precluded by SLUSA. The Second Circuit, however, vacated the dismissal holding that certain claims were not subject to SLUSA preclusion. Because plaintiffs made attempted investments in covered securities, albeit through feeder funds, defendants’ alleged false conduct is in connection with a covered security under SLUSA. Those claims were properly dismissed. However, claims based on defendants’ breach of contractual, fiduciary, and/or tort‐based duties to plaintiffs to provide competent management, consulting, auditing, or administrative services, which allowed Madoff’s frauds to go undetected and thereby causing plaintiffs’ losses, were not precluded by SLUSA since they do not allege SLUSA false conduct by defendants. In re Kingate Management Limited Litigation.

Claims Stemming from Bank’s Failure Belong to the FDIC

On April 21st, the Tenth Circuit affirmed the dismissal of a lawsuit stemming from the collapse of a bank. Shareholders in Barnes Bancorporation, parent of the failed bank, filed breach of fiduciary duty claims against Barnes and its officers and directors. The Tenth Circuit held that when the FDIC became receiver for the failed bank, the Financial Institutions Reform, Recovery, and Enforcement Act gave the FDIC all rights that Barnes, a stockholder of the bank, possessed with respect to the bank and its assets. Other than a claim regarding funds which defendants allegedly misused, plaintiffs did not allege any harm to Barnes that was distinct and separate from the harm to the bank. The District Court therefore properly dismissed those claims. Barnes v. Harris.

Industry News

Progress Leads to Delay

On April 24th, Bloomberg quoted E.U. capital markets minister Jonathan Hill as saying that progress is being made on the treatment of cross­border swaps transactions between the U.S. and E.U. As a result, the E.U. will likely postpone the implementation of new swaps rules for up to six months. Progress.

Profile of Loretta Lynch

On April 23rd, Bloomberg profiled Loretta Lynch, the incoming U.S. Attorney General, discussing her prior prosecutions involving mortgage­backed securities and speculating on what to expect in the coming months. Profile.

Transaction Tax

On April 23rd, the Washington Post discussed Senator Elizabeth Warren’s proposal to impose a tax of .01 or .02 percent on every stock trade in order to discourage the type of manipulative activity which allegedly contributed to the May 6, 2010 Flash Crash. Transaction Tax.

Internal Control Evolution

On April 23rd, noted how internal control issues have evolved and changed over time, using recent regulatory actions and private lawsuits as examples and discussing ways in which finance departments can address these developments. Evolution.

Britain Questions U.S. over Berkshire

On April 20th, the Financial Times reported the Bank of England has asked the U.S. Treasury Department to explain why Berkshire Hathaway’s reinsurance unit has not been provisionally listed as a global systemically important financial institution. Questions.

The Volcker Proposal

On April 20th, the Volcker Alliance, founded by former Federal Reserve Board Chair Paul A. Volcker, published a report recommending reforms to the financial regulatory system. Among other things, the report proposes the establishment under the Financial Stability Oversight Council of a Systemic Issues Committee, which would vote on designations of systemically important financial institutions and risky activities and practices, and the merger of the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”). Volcker Alliance Press Release.

He’s Back (Maybe)

On April 20th, MarketWatch reported the former head of MF Global Holdings Ltd., Jon S. Corzine, may start a hedge fund, seeding it with his own capital as well as that from outside investors. Hedged Return.