Insights from Winston & Strawn

SEC and FINRA 2016 Examination Priorities

As 2016 begins, the examination priorities (“Examination Priorities”) released by the Financial Industry Regulatory Authority (“FINRA”) on January 5th and the Securities and Exchange Commission (“SEC”) on January 11th  provide firms with a peek into the regulatory landscape for the year to come.

The SEC’s Examination Priorities, issued by the Office of Compliance Inspections and Examinations (“OCIE”) focuses on protecting retail investors and investors saving for retirement, assessing market-wide risks and using data analytics to identify signals of potential illegal activity.  Many priorities represent areas of ongoing focus by OCIE, such as cybersecurity fee arrangements and disclosures, and the “Never-Before Examined” investment adviser and investment company initiatives. New priorities pertain to public pension advisers, liquidity controls, and suitability and disclosure issues relating to certain investment products.  For example, OCIE will be examining exchange-traded funds’ (“ETFs”) sales strategies, trading practices and disclosures, including excessive portfolio concentration, primary and secondary market trading risks, adequacy of risk disclosure, and suitability, particularly in niche or leveraged/inverse ETFs. OCIE also announced the revival of its interest in private fund advisers’ controls and disclosures associated with side-by-side management of performance fee and pure asset-based fee accounts. SEC Examination Priorities.

FINRA’s Examination Priorities focuses on firm culture, conflicts of interest and ethics, risk management and controls, and liquidity issues. FINRA identifies five cultural indicators of how a firm’s culture influences compliance and risk management practices: (1) whether a firm’s control functions are valued within the organization; (2) whether a firm tolerates policy or control breaches; (3) whether a firm proactively seeks to identify risk and compliance events; (4) whether a firm’s supervisors are effective role models; and (5) non-conforming subcultures within a firm. FINRA supervision and risk management examinations in 2016 will emphasize the management of conflicts of interest, cybersecurity, technology, outsourcing and anti-money laundering (“AML”). With respect to liquidity issues, FINRA will review the adequacy of firms’ contingency funding plans both in light of their business model and in connection with testing for marketwide and idiosyncratic stresses.  FINRAwill also evaluate high-frequency-trading firms’ liquidity planning and controls.  FINRA Examination Priorities.

Firms should consider the Examination Priorities as they conduct their annual reviews of policies, procedures, and business activities, keeping in mind that the Examination Priorities are not exhaustive and both FINRA and the SEC will continue to pursue areas of focus from recent years, as well as new matters that may arise from market developments. Firms can refer to Winston & Strawn’s Reminder of Annual Requirements for Investment Managers for an overview of 2015 regulatory developments and ongoing obligations that may be applicable to them.

Feature: Anti-Money Laundering Law Applies to Corporate Compliance Officers

Chief Compliance Officer (“CCO”) groups recently stated that their members are feeling more susceptible to possible enforcement actions in 2016, as federal regulators such as the SEC will be more closely watching that CCOs implement the policies they were hired to oversee. One major policy that a CCO must supervise is the company’s AML program and, while federal regulators have traditionally developed and policed AML procedures, some states are taking measures to enforce those rules.

New York Governor Andrew Cuomo just last month proposed regulations that would require banks operating in New York to implement rigorous measures to prevent money laundering and the financing of terrorist groups. The proposed regulations stem from “serious shortcomings” that were uncovered during a series of recent investigations that focused on terrorist financing and AML compliance at financial institutions that have branches in New York. The proposed regulations, which are being drafted by the New York Department of Financial Services (“NYDFS”), will require a bank’s CCO to certify whether the bank sufficiently espouses the proper systems to detect and prevent illicit money transfers. In addition, according to the proposal, CCOs could even face criminal penalties for filing false certifications.

Some CCOs are also facing civil penalties for AML policy failures. Thomas E. Haider, the former CCO for wire transfer company MoneyGram International Inc., was very recently fined a $1 million personal civil money penalty for failing to maintain an effective AML program at MoneyGram. Haider asked a federal court in Minnesota to dismiss the complaint, arguing that this sort of penalty cannot be sought against an individual and that any legal action is time-barred. On January 8, 2016, Minnesota U.S. District Court Judge David Doty denied Haider’s motion, holding that CCOs and other individuals, and not only the companies for which they are employees, can be held personally responsible for AML control failures pursuant to the Bank Secrecy Act (“BSA”).

Haider, who was responsible for overseeing MoneyGram’s fraud department, had been tasked to ensure that the company had an effective AML program. In his position as CCO, Haider had to file timely suspicious activity reports (“SARs”) with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) from 2003 until 2008, the year that he left the company. The SARs were supposed to identify financial transactions that were sent by or through MoneyGram; involved funds of at least $2,000; and MoneyGram knew, suspected, or had reason to suspect involved the use of MoneyGram’s money transfer system to facilitate criminal activity. After Haider left MoneyGram in 2008, the U.S. government had a Middle District of Pennsylvania grand jury investigate whether the firm had violated the BSA by failing to maintain an effective AML program. In 2012, in a deferred prosecution agreement with the U.S. Department of Justice, MoneyGram admitted that it violated the BSA’s AML provision, agreed to forfeit $100 million, and further agreed to hire an independent, government-approved compliance monitor.

Then, in December 2014, FinCEN assessed a personal civil money penalty of $1 million against Haider. In a case of first impression, FinCEN had contended that Haider, among other things, had a direct role in MoneyGram’s failure to file the required SARs; failed to implement an adequate AML system; failed to terminate known high-risk agents and outlets that MoneyGram personnel understood were involved in fraud and/or money laundering, including outlets that Haider himself was on notice posed an unreasonable risk of fraud and/or money laundering. This personal penalty was referred to as a rare case of a compliance team member, and not just the company for which that compliance team member is an employee, being held responsible for control failures.

Basing its decision on Haider’s conduct from November 15, 2007 through May 23, 2008, FinCEN found Haider subject to a $25,000-per-day penalty for his alleged AML program violations and $25,000 per violation for his over 40 alleged failures to timely report suspicious activity. Haider’s lawyers challenged FinCEN’s ability to impose a personal penalty under the BSA, calling the action “unfounded” and the wrong case in which to establish a reinforced standard of individual responsibility.

The U.S. Treasury subsequently filed an enforcement action in the Southern District of New York, seeking an order reducing FinCEN's assessment to a judgment and enjoining Haider from working for any “financial institution,” as defined by the BSA. The case was later transferred to Minnesota. On denying Haider’s motion to dismiss last week, Minnesota U.S. District Court Judge David Doty ruled that “the plain language of [the BSA] provides that a civil penalty may be imposed on corporate officers and employees like Haider, who was responsible for designing and overseeing MoneyGram’s AML program.” The court noted that the provision of the BSA that requires that institutions establish AML programs is governed by the BSA’s broader civil penalty provision, which allows penalties against a “partner, director, officer, or employee.” Haider’s lawyers countered with contentions that Haider was deprived of due process rights due to bias and press leaks, that the $1 million fine levied against him was unduly large, and that the penalty was time barred. The court determined that those issues should be decided after discovery took place.

It is obvious that, as the government continues to crack down on banks that violate AML rules, individuals also have to defer to the high standards that the rules place on CCOs. While the Haider case did not allege that he actively participated in AML violations, it outlined a list of ways in which his alleged failure to act and ineffectiveness as an AML compliance officer led to the alleged violations. The Haider case is just one of several that have made clear in AML compliance actions that AML compliance officers are on the line, and the authorities will not hesitate to sanction them.

Banking Agency Developments


OCC Comptroller Discusses Expanding 18-Month Exam Cycle for More Community Banks and Savings Associations

On January 21st, the Office of the Comptroller of the Currency (“OCC”) published Comptroller Thomas J. Curry’s remarks, at the Federal Deposit Insurance Corporation’s (“FDIC”) meeting of its board of directors, on increasing the number of small community banks and savings associations eligible for an 18-month examination cycle. The FDIC’s board approved an interim final rule to allow well-managed community banks and thrifts with less than $1 billion in assets to qualify for the 18-month exam cycle. The previous threshold was $500 million. The interim final rule follows authority granted by Congress in December 2015. OCC Press Release.


FDIC Seeks Comment on Revised Proposal to Amend How Small Banks Are Assessed for Deposit Insurance

On January 21st, the FDIC’s board of directors sought comment on a revised proposed rule that would amend the way in which small banks are assessed for deposit insurance. The proposed rule would affect banks with less than $10 billion in assets that have been insured by the FDIC for at least five years. The proposed rule would also update the data and revise the methodology that the FDIC uses to determine risk-based assessments for these institutions to better reflect risks and help ensure that banks that take on greater risks pay more for deposit insurance than their less risky counterparts. The FDIC revised the online assessment calculator that allows institutions to estimate their assessment rates under the proposal to reflect the updated proposal. Comments on the proposed rule will be received for 30 days following publication in the Federal Register. FDIC Press ReleaseGruenberg Statement.

Treasury Department Developments

U.S. Treasury Releases TIC Data for November 2015

On January 19th, the U.S. Department of the Treasury released Treasury International Capital (“TIC”) data for November 2015. The November total of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC outflow of $3.2 billion. Of this, net foreign private outflows were $12.5 billion, and net foreign official inflows were $9.3 billion. Foreign residents increased their holdings of long-term U.S. securities in November while net purchases were $41.0 billion. Net purchases by private foreign investors were $41.2 billion, while net sales by foreign official institutions were $0.2 billion. U.S. residents increased their holdings of long-term foreign securities, with net purchases of $9.6 billion. U.S. Treasury Press Release.

U.S. Treasury Launches Investigation Into Treasury Market

On January 19th, Reuters reported that the U.S. Treasury has launched an investigation into the workings of the Treasuries market in light of the “flash crash” on October 15, 2014, when the market was shaken with instability. Referring to it as the most widespread review of the market in decades, the Treasury Department noted that its report will also be looking into gathering data on Treasury cash securities and whether the public would benefit from additional information about transactions. Through a Request for Information (“RFI”) to be published in the Federal Register, the Treasury is seeking public comment on the evolving structure of the U.S Treasury market. ReutersU.S. Treasury Press Release.

Securities and Exchange Commission

Proposed Rules

SEC Extends Comment Period for Resource Extraction Payments Disclosure Rule.

The SEC announced on January 21st that it has reopened the comment period for its proposed rules that would require the disclosure of payments made by resource extraction issuers to the U.S. or foreign governments for the purposes of commercial development. Initial comments on the proposal should be submitted on or before February 16, 2016. Reply comments responding to issues raised in the initial comment period should be submitted on or before March 8, 2016. SEC Release No. 34-76958.

Elimination of Indemnification Requirement Prompts SEC to Reopen Comments on Security-Based Swap Data Repositories Proposal

In response to modifications to the data access provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) by the Surface Transportation Reauthorization and Reform Act of 2015, the SEC announced on January 15th that it has reopened the comment period for its proposed amendments to Rule 13n-4 under the Exchange Act. The proposed rule amendments would require security-based swap data repositories to make data available to regulators and other authorities. The SEC noted that the removal of the indemnification requirement from the statutory data access provisions has rendered the conditional exemption from the indemnification requirement in the original proposal unnecessary. Comments should be submitted on or before February 22, 2016. SEC Release. No. 34-76922.

No-Action Relief

Division of Trading and Markets Grants No-Action Relief to CME for Limited Clearing Activities for Certain Single-Name CDS Contracts

The SEC published a no-action letter on January 15th issued by the Division of Trading and Markets in response to the Chicago Mercantile Exchange Inc. (“CME”), which requested relief from provisions of the Exchange Act governing clearing agency registration and the segregation of customer assets. The Division indicated that it would not recommend enforcement action against CME and its credit default swap (“CDS”) clearing members if they engage in limited clearing activities that involve specified single-name CDSs that reference a component of a broad-based index that is “spun out” of that broad-based index CDS.  SEC No-Action Letter.

Statements and Speeches

Chair White Addresses the Investor Advisory Committee Meeting

In her opening remarks at the Investor Advisory Committee Meeting on January 21st, SEC Chair Mary Jo White provided an overview of the SEC’s rulemaking activities since the end of October 2015, updated the committee on the release of the SEC staff analysis of the events of August 24th, and emphasized the importance of the committee’s consideration of fixed income market structure and pre-trade price transparency as well as the Financial Accounting Standards Board’s outstanding disclosure proposals. White Remarks.

Piwowar Calls for Action to Increase Pre-Trade Transparency.

Addressing the Investor Advisory Committee on January 21st, SEC Commissioner Michael S. Piwowar praised recent regulatory efforts to address fixed income market structure and emphasized the need to enhance pre-trade transparency to ensure that the fixed income markets “are working appropriately for all market participants.”Piwowar Remarks.

Higgins Discusses the Past, Present, and Future of Global Securities Markets

In a keynote address delivered on January 21st to the 15th Annual Institute on Securities Regulation in Europe, SEC Division of Corporation Finance Director Keith Higgins reflected on the 30th anniversary of the SEC’s study of the globalization of the securities market, reviewed the measures that have been implemented to address challenges posed by cross-border offerings, and discussed the implications of crowdfunding, disclosure reform, and interim financial reporting for global securities markets. Higgins Remarks.

Other Developments

Money Market Fund Statistics

On January 21st, the SEC’s Division of Investment Management released money market fund statistics data as of December 31, 2015. Money Market Fund Statistics.

Staff Announcements

The SEC announced on January 20th that Susan Nash, Associate Director in the Division of Investment Management, will depart the agency at the end of the month. During her tenure at the SEC, Nash played a key role in the development of disclosure policy initiatives for mutual funds and other investment companies. SEC Press Release.

Commodity Futures Trading Commission

No-Action Relief

DMO Extends No-Action Relief on Masking Certain Reportable Identifying Information

On January 15th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced that its Division of Market Oversight (“DMO”) issued a letter providing a conditional, time-limited extension of the relief provided in CFTC Letter 13-41 regarding masking of certain identifying information required to be reported. CFTC Press Release.

Other Developments

CFTC Grants Registration to 18 Swap Execution Facilities

On January 22nd, the CFTC issued orders granting registration to 18 swap execution facilities (“SEFs”), which were previously under temporary registration status. CFTC Press ReleaseGiancarlo Statement.

CFTC Launches Whistleblower Program’s Website

On January 21st, the CFTC launched the CFTC Whistleblower Program’s new Website, which provides an improved interface that educates the public about the Whistleblower Program and allows users to submit tips about potential violations of the Commodity Exchange Act (“CEA”) and apply for monetary awards. CFTC Press Release.

Federal Rules Effective Dates

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Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

SEC Approves CBOE Exchanges’ Proposed Price Protection Enhancements

On January 21st, the SEC issued an order granting accelerated approval of the Chicago Board Options Exchange, Incorporated’s (“CBOE”) and C2 Options Exchange, Incorporated’s (“C2”) separately filed proposals that would amend their respective rules to improve current price protection mechanisms and adopt new price protection functionality for orders and quotes, including implementing put strike price and call underlying value checks, a new price reasonability check to Market Maker quotes based on either the national best bid or offer or the Exchange’s best bid or offer, debit/credit price reasonability checks, and a maximum value acceptable price range check for complex orders.

Financial Industry Regulatory Authority

FINRA Announces Increase in Section 31 Fee Rate

FINRA notified member firms on January 20th that the Section 31 fee rate applied to specified securities transactions on the exchanges and in the over-the-counter markets will be set at $21.80 per million dollars in transactions. The new fee rate will apply beginning on February 16, 2016. FINRA Information Notice.

FINRA Encourages Members to Develop Procedures to Address OTC Equity Trade Reporting During Systems Issues

FINRA published a Trade Reporting Notice on January 20th that reviews requirements for firms to establish written policies and procedures to determine a firm’s response in the event of a systems issue during the trading day that prevents firms from reporting over-the-counter transactions in equity securities to FINRA.  Firms must develop a predetermined response to address issues arising from FINRA facility systems as well as issues arising from their own or their vendors’ systems. FINRA Trade Reporting Notice.   

International Swaps and Derivatives Association

ISDA Report Analyzes the Effect of Compression and Clearing on Interest Rate Derivatives

On January 21st, the International Swaps and Derivatives Association (“ISDA”) published a research note that examines the interest rate derivatives (“IRD”) market. Among other things, the report highlights the increased role of clearing and compression on the market, noting that more than two-thirds of IRD notional outstanding was cleared at the end of June 2015 and the use of compression services has reduced the size of the market by approximately 62 percent.  ISDA Press Release.

Municipal Securities Rulemaking Board

MSRB Board of Directors to Discuss Confirmation Disclosure and Bank Loans at Upcoming Meeting

On January 20th, the Municipal Securities Rulemaking Board (“MSRB”) published the agenda for its Board of Directors meeting, which will take place on January 27-28, 2016. Topics for the meeting include the MSRB’s proposal to require mark-up information on retail customer confirmations, secondary market disclosure in the municipal market related to bank loans and other alternative financing, and potential clarifications to the MSRB’s rules related to minimum denominations for municipal securities sold to investors. MSRB Press Release.


Nasdaq Proposes Changes to NOM Transaction Fees

On January 21st, the SEC provided notice of a proposed rule change filed by The Nasdaq Stock Market LLC (“Nasdaq”) that would amend its rules governing pricing for Nasdaq members using the NASDAQ Options Market (“NOM”) to change the NOM transaction fees for executing and routing standardized equity and index options under the Penny Pilot Options program. Comment should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 25. SEC Release 34-76956.

National Futures Association

NFA Revises Regulatory Requirements Guide

On January 21st, the National Futures Association (“NFA”) published an updated version of its Regulatory Requirements for Futures Commissions Merchants (“FCMs”), Introducing Brokers (“IBs”), Commodity Pool Operators (“CPOs”), and Commodity Trade Advisors (“CTAs”). The updated guide reflects revisions to the NFA’s Financial Requirements to comply with the CFTC’s rulemaking, Enhancing Protections Afforded Customers and Customer Funds held by FCMs and DCOsNFA Regulatory Requirements Guide.

Industry News

Senate Democrats Put Pressure on SEC to Require Corporations to Disclose Political Contributions

On January 21st, The Wall Street Journal reported that Senate Democrats are putting pressure on the SEC to start working on new rules that would require corporations to disclose their political contributions, despite a new law that precludes the SEC from finalizing such a measure in 2016. Democrats have long argued that requiring political spending disclosures would provide greater transparency into the connection between corporations and politicians, while Republican lawmakers say that such requirements are ill-advised because companies’ political contributions generally have no effect on their financial performance or are not “material.” The Wall Street Journal.

Ejected American Apparel Founder Attempts to Regain Control of Company.

Dov Charney, the founder of American Apparel who was fired by the company’s board in 2014 for allegedly misusing company funds and allowing an employee to post naked pictures of a former female worker, appeared in Bankruptcy Court in a final effort to regain control of the company. On January 21st, The New York Timesreported that Charney, who denied the board’s accusations, accused former partners of stealing away his multimillion-dollar empire and declared that his alliance with investors was the only way to save it. The New York Times.

Senate Committee Chair Asks CFTC to Explain Accounting Error.

On January 21st, Reuters reported that Senate Agriculture Committee Chairman Pat Roberts has asked for a full explanation from the CFTC of a significant material accounting error that led auditor KPMG to withdraw almost a decade of financial opinions about the agency’s accounts. KPMG contended that the error, regarding how the CFTC accounted for lease payments for its offices from fiscal years ending in 2005 through 2014, was caused by the CFTC’s “weaknesses in internal control,” including lack of measures to detect or correct material problems in its financial statements. Reuters.

U.S. Supreme Court to Hear California Insider Trading Case.

On January 19th, The New York Times reported that the U.S. Supreme Court has agreed to decide on a dispute about what prosecutors need to prove in order to get convictions for insider trading. The California case involves trading by Bassam Salman based on information from his future brother-in-law, then a member of Citigroup’s health care investment banking group. The question in the case is whether prosecutors had to prove that Salman’s brother-in-law disclosed the information in exchange for a personal benefit. Just this past October, the Court declined to review this question in 2014’s U.S. Court of Appeals decision in United States v. Newman, which made it harder to prosecute insider trading cases. The New York Times.

Anticipated Legislation to Add Scrutiny of Regulators is Gaining Momentum

On January 19th, DealBook reported that a bipartisan group of senators is working on a package of regulatory reform bills that would subject regulators including the Consumer Financial Protection Bureau (“CFPB”) and the SEC to “a heightened cost-benefit analysis and review process for major rules.” While supporters of the legislation say that it would provide more transparency in the rule-making process, critics warn that it would instead create additional burdens and delays. DealBookDealBook – Another View.