Insights from Winston & Strawn

FINRA’s 2017 Annual Regulatory and Examination Priorities Letter

Last week, the Financial Industry Regulatory Authority, Inc. (“FINRA”) released its Annual Regulatory and Examination Priorities Letter (“Priorities Letter”) for 2017. The Priorities Letter (available here) highlights areas that FINRA plans to review in its 2017 examinations. While many of the covered topics are long-standing priorities, shifts in emphasis or focus from one letter to the next can provide useful insight into FINRA’s current thinking on these perennial topics.

Significantly, the Priorities Letter is the first for new FINRA President and CEO, Robert W. Cook. Mr. Cook took over leadership of FINRA from Richard G. Ketchum in August of last year. As Mr. Cook’s cover letter (available here) makes clear, since joining FINRA, he has been in a listening mode, meeting with member firms, regulators, and investor groups. Mr. Cook states that, as a result, he plans “to take a fresh look at certain aspects of FINRA’s programs and operations and to identify opportunities to do our work more effectively.” Notwithstanding this forward-looking statement, Mr. Cook does provide what he characterizes as “modest steps” that FINRA is already planning to take.

The first of these is to provide more transparency regarding what FINRA is seeing in its examinations. While this is not a wholly new endeavor for FINRA, as FINRA has frequently summarized examination findings on selected topics in years past, Mr. Cook states that “starting this year” FINRA will “publish a summary report that outlines key findings from examinations in selected areas.” The second is for FINRA to provide more in the way of compliance tools and resources to assist firms, particularly small firms, in meeting their regulatory requirements. The first tools promised consist of a compliance calendar and a directory of compliance service providers. Leaving aside that the promised directory sounds more like a marketing piece than a compliance tool, Mr. Cook should be applauded to the extent FINRA does, in fact, develop resources and tools that provide genuine assistance to members. More generally, the fact that Mr. Cook is taking a “fresh look” at FINRA is also worthy of applause, as any organization, and especially one as large and complex as FINRA, is likely to benefit from a fresh look every so often.

All FINRA members would benefit from a careful review of the Priorities Letter. As to each priority, firms should ask whether it is applicable to their business activities. If so, firms may want to consider how well their practices, policies, and procedures match up to the identified concerns and whether updates or revisions may be needed. Firms should also consider the extent to which they have documented their relevant supervision and monitoring efforts. That is, firms should ask whether, if they were examined, they would be able to provide convincing documentation of such efforts. Firms may also want to consider whether additional training, educational notices, and other, similar efforts might be helpful, both as a way of improving their compliance and as a means, should they be examined, of demonstrating the seriousness with which they take the applicable issue.

The Priorities Letter also mentions a couple of new examination initiatives. The first of these include electronic, off-site reviews that will be used to supplement traditional on-site cycle examinations. That is, the exams will be in addition to, and not in place of, the on-site cycle examination, and, is likely to fall in a year in which the cycle exam is not scheduled. The Priorities Letter states that FINRA will make “targeted and limited information requests to firms and then analyze responses off-site.” The Priorities Letter further states that these off-site exams will be conducted with respect to a select group of firms that are not currently scheduled for a cycle exam in 2017. Though not stated, presumably these new exams will not merely be additive to the total exam load but will help focus and perhaps reduce the scope of the traditional on-site examination.

The second initiative is a pilot trading examination program that will target smaller firms that have historically not been subject to trading examinations due to their relatively low trading volume. Small firms with low trading volume should consider themselves warned and should consider whether they are prepared for such an examination.

As to the priorities themselves, a brief overview is provided below, though again it is strongly recommended that FINRA members review the entire Priorities Letter carefully as the 11-page letter cannot be adequately covered in this briefing.

High-risk and Recidivist Brokers

This includes a focus on firms’ hiring processes and whether “a firm or third-party service provider conducts a national search of reasonably available public records to verify the accuracy and completeness of the information contained in an applicant’s Form U4.” Also covered is whether firms have developed and implemented an appropriate supervisory plan for such brokers.

Branch Offices including, but not limited to, Independent Contractor Branch Offices

The Priorities Letter references branch offices at a couple of points. One reference, which is included under the topic of “High-risk and Recidivist Brokers,” states that FINRA will continue to focus on firms’ branch office inspection programs and specifically states that this will include, but not be limited to, independent contractor branches. This focus will include supervision of account activity, advertising and communications, and operational activities such as distribution of funds and changes of address or investment objectives. Under the “Cybersecurity” subheading (under “Operational Risks”), the Priorities Letter also identifies a concern with cybersecurity controls at branch offices and, particularly, independent contractor branch offices.

Sales Practices

The Priorities Letter identifies the protection of senior investors as a top priority in 2017 and states that FINRA will assess “controls to protect senior investors from fraud, abuse and improper advice.” While these controls should include a focus on suitability, the Priorities Letter states that they should also be designed to protect seniors from microcap or penny stock fraud schemes. As examples of controls that firms can implement to protect elderly customers, the Priorities Letter states that “firms can contact an elderly customer in instance where the customer has placed a purchase order for a speculative penny stock through the customer’s online brokerage account, can question a customer about inquiries to buy or sell penny stocks held outside the firm and can ask a customer about instructions to transfer funds to persons who may be tied in some way to the issuer.”

Other sales practice focus areas include supervision and monitoring of excessive and short-term trading of long-term products as well as the need for firms to discuss the impact that shifts in the interest rate environment may have on recommendations to clients.

The Priorities Letter also highlights the need for firms to focus on their registered representatives’ outside business activities, private securities transactions, and use of social media and electronic communications, including the retention and supervision of such communications.

Liquidity Risks

The Priorities Letter states that “FINRA will review firms’ funding and liquidity plans and assess whether firms adequately evaluate their liquidity needs related to market wide and idiosyncratic stress, develop contingency plans so that they have sufficient liquidity to endure those stresses, and conduct stress tests and other reviews to gauge the effectiveness of their contingency plans.”


The Priorities Letter characterizes cybersecurity as “one of the most significant risks many firms face” andr lists a number of areas of likely review. These include cybersecurity-related shortcomings at branch offices and, particularly, independent contractor branch offices. Also highlighted are failures to comply with the requirement under Securities Exchange Act Rule 17a-4(f) to maintain electronic documents in a non-rewritable, non-erasable format.

Market Integrity

The Priorities Letter states that deterring manipulation should be a priority for firms and specifically instructs firms that they should be using the Cross Market Equity Supervision Report Cards, which are issued by FINRA, as a compliance tool to complement firms’ supervisory systems and procedures to deter manipulative conduct by firms and their customers. That said, the Priorities Letter also states that these Report Cards should be used as a supplement to, and not a replacement for, firms’ own reviews into potentially manipulative activity.

Other Areas of Focus

Other areas of focus include supervisory control testing, compliance with the close-out and easy-to-borrow provisions of Regulation SHO, anti-money laundering and suspicious activity monitoring, best execution, and compliance with the municipal advisor registration provisions. The Priorities Letter also identifies a focus on firms’ compliance with the requirements of Securities Exchange Act Rule 15c3-3—the customer protection rule, which requires segregation of customer assets. In particular, the Priorities Letter cautions against firms entering into transactions with little or no economic substance, designed primarily to reduce their reserve or segregation requirement under the financial responsibility rules. Glen Barrentine

Feature: SEC’s Hiring of its ALJs Is Unconstitutional

In 2012, the U.S. Securities and Exchange Commission (“SEC”) brought an administrative action against Colorado businessman David F. Bandimere, alleging that he violated various securities laws. An SEC administrative law judge (“ALJ”), who presided over a trial-like hearing, initially found Bandimere liable for securities violations, barred him from the securities industry, ordered him to cease and desist from violating securities laws, imposed civil penalties, and ordered disgorgement. The SEC reviewed the ALJ’s decision and, in a separate opinion, reached a similar result, while at the same time acknowledging that the ALJ had not actually been constitutionally appointed since the agency’s ALJs are not appointed by the President, a court of law, or the head of a department. The SEC, however, rejected Bandimere’s argument that the ALJ was an inferior officer. Bandimere then filed a petition for review with the Tenth Circuit in Denver, once again raising his argument that the ALJ was an inferior officer who had not been appointed under the Appointments Clause. He also challenged the SEC’s findings on securities fraud liability and sanctions.

Disagreeing with the District of Columbia Circuit, which recently held in Lucia v. SEC that ALJs are considered employees and not officers subject to the Appointments Clause, a divided three-judge panel on December 27th granted Bandimere’s petition for review in Bandimere v. SEC and set aside the SEC’s opinion. The panel held that since the ALJ was not constitutionally appointed, he held his office in conflict with the Appointments Clause when he presided over Bandimere’s hearing. The panel further concluded that the ALJ who presided over an administrative enforcement action against Bandimere was, in fact, an inferior officer pursuant to the U.S. Supreme Court’s Freytag v. Commissioner of Internal Revenue. In Freytag, the U.S. Supreme Court held that the Tax Court‘s special trial judges (“STJs”) are inferior officers within the meaning of the Appointments Clause based on three characteristics – the Tenth Circuit found all of these characteristics present in the Bandimere case:

  1. The position of the SEC ALJ was “established by law” as the Administrative Procedure Act of 1946 established the ALJ position and the Securities and Exchange Act of 1934 authorizes the SEC to delegate “any of its functions” with the exception of rulemaking to ALJs, and gives the SEC’s “Office of Administrative Law Judges” power to “conduct hearings” and “proceedings”;
  2. The duties, salary, and means of appointment are specified by statute and SEC ALJ, who are not “hired … on a temporary, episodic basis,” receive career appointments and can be removed only for good cause; and
  3. SEC ALJs “exercise significant discretion” in “carrying out … important functions,” as they have “authority to do all things necessary and appropriate to discharge their duties and, when presiding over trial-like hearings, make credibility findings to which the SEC affords “considerable weight” during agency review. They also have authority to issue initial decisions that declare respondents liable and impose sanctions; have power to enter default judgments; and have authority to set aside, make permanent, limit, or suspend temporary sanctions imposed by the SEC itself.

Reacting to this decision, which the Washington Post regarded as “potentially quite significant,” DealBook suggested that the U.S. Supreme Court will likely step in to consider which label applies to the judges to decide whether the  Appointments Clause is triggered. Administrative law expert and Case Western law professor Jonathan Adler agreed, stating that “unless the SEC adjusts the manner in which it appoints ALJs – such as by providing for their ultimate appointment by the SEC chair – this case is likely on its way to the [U.S.] Supreme Court.” 

FINRA – Regulatory Matters at a Glance

Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.

Banking Agency Developments


Expanded Examination Cycle Eligibility

On January 6th, the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) announced that they have published an interagency final rule that adopts without change the February 29, 2016, interim final rule amending the regulations governing eligibility for the 18-month on-site examination cycle. Pursuant to the Fixing America’s Surface Transportation Act (“FAST Act”), the interim final rule made qualifying 1- and 2-rated national banks, federal savings associations, and federal branches and agencies with less than $1 billion in total assets eligible for an 18-month (rather than a 12-month) examination cycle. 

Revised Comptroller’s Licensing Manual Booklet

On January 6th, the OCC announced that it has issued the “Changes of Corporate Title and Address” booklet of the Comptroller’s Licensing Manual, which revises the booklet of the same title issued in October 2009. The revised booklet incorporates updated procedures and requirements following the integration of the Office of Thrift Supervision into the OCC in 2011 and the issuance of revised regulations that became effective July 1, 2015.

OCC Report Discusses Risks Facing National Banks and Federal Savings Associations

On January 5th, the OCC announced the publication of its Semiannual Risk Perspective for Fall 2016, which reported strategic, credit, operational, and compliance risks as top concerns.

Industrial and Commercial Metals

On January 3rd, the OCC announced that it has issued a final rule prohibiting national banks and federal savings associations from dealing or investing in “industrial or commercial metal.” The effective date of the final rule is April 1, 2017.

Revised Comptroller’s Handbook Booklet and Rescissions

On December 30th, the OCC announced that it has issued the “Internal and External Audits” booklet of the Comptroller’s Handbook. The revised booklet provides guidance to examiners assessing audit exposures, associated risks, and risk management practices.

Underwriting Standards Ease for Fourth Consecutive Year, OCC Survey Shows

On December 20th, the OCC announced the release of its 2016 Annual Survey of Credit Underwriting Practices, in which, examiners reported an incremental easing of underwriting practices within commercial and retail loans across 93 national banks and federal savings associations. The examiners determined that easing standards reflect the banks’ response to competitive pressures, expanding credit risk appetites, and a desire for loan growth.

OCC Adopts Framework for Receiverships for Uninsured Federally Chartered National Banks

On December 20th, the OCC announced its release of a final rule setting forth a framework for placing uninsured national banks into receivership. The final rule will apply to all uninsured national banks regulated by the OCC, but will not apply to federal savings associations, all of which are insured. The final rule will become effective on January 19, 2017. OCC Bulletin.

Andrew M. Pugh Named Deputy Comptroller for Administrative Operations

On December 19th, the OCC announced that it has selected Andrew M. Pugh to be the agency’s Deputy Comptroller for Administrative Operations. Mr. Pugh will supervise the OCC’s Workplace Services and Acquisition Management functions, and its Office of Security.

Interagency FAQs on New Accounting Standard on Financial Instruments – Credit Losses

On December 19th, the OCC, along with the Board of Governors of the Federal Reserve System, the FDIC, and the National Credit Union Administration, announced that they are publishing frequently asked questions to assist financial institutions and examiners with the new accounting standard, Accounting Standards Update 2016-13, Topic 326, “Financial Instruments – Credit Losses,” issued by the Financial Accounting Standards Board in June 2016. The new accounting standard introduces the current expected credit losses methodology for estimating allowances for credit losses. The effective date of the new credit losses standard depends on the financial institution’s characteristics. For SEC filers, the new credit losses standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.


FFIEC Streamlines “Call Report” for Small Institutions

On December 30th, the FFIEC announced that its federal banking agencies have published a Federal Register Notice finalizing the reporting requirements for a new and streamlined “Call Report” for small financial institutions.

Federal Reserve

Board and FOMC Seek Comment on Rules to Amend Regulations under FOIA

On December 23rd, the Board and the Federal Open Market Committee (“FOMC”) invited public comment on interim final rules to amend regulations for processing requests under the Freedom of Information Act (“FOIA”). The effective date for the interim final rules was December 27, 2016. Comments are requested within 60 days of publication in the Federal Register, which is expected shortly.

Comment Period Extended on Proposed Rule to Strengthen Requirements, Limitations on Physical Commodity Activities of Financial Holding Companies

On December 20th, the Board extended until February 20, 2017, the comment period for its proposed rule that would strengthen existing requirements and limitations on the physical commodity activities of financial holding companies. The proposal would help reduce the catastrophic, legal, and financial risks that physical commodity activities pose to financial holding companies.

Board Announces Appointment of Chairs and Deputy Chairs

On December 20th, the Board announced the designation of the chairs and deputy chairs of the 12 Federal Reserve Banks for 2017.

Board Requests Comment on Proposed Guidelines to Evaluate Requests for Joint Accounts at Federal Reserve Banks

On December 19th, the Board requested comment on proposed guidelines that would be used to evaluate requests for joint accounts at Federal Reserve Banks. The accounts are intended to facilitate settlement between depository institutions participating in U.S. payment systems. Comments on the proposed guidelines are requested within 60 days of publication in the Federal Register, which is expected shortly.

Board Approves Rule Requiring Public Disclosure of Certain Quantitative Liquidity Risk Metrics

On December 19th, the Board announced that it approved a rule requiring, for the first time, that large banking organizations publicly disclose certain quantitative liquidity risk metrics.

Securities and Exchange Commission

Final Rules 

SEC Corrects Exchange Act Rule 12g-1 Language on Holder of Record Threshold

On December 21st, the SEC issued a technical correction to final rules adopted in May 2016 that implement changes to Securities Exchange Act registration requirements as mandated by the Jumpstart Our Business Startups (“JOBS”) Act and the Fixing America’s Surface Transportation (“FAST”) Act. The revised rule corrects language to more precisely reflect the holder of record threshold established by Exchange Act Section 12(g)(1).

Speeches and Statements

White Indicates that Work on Global Accounting Rules Will Wait for Her Successor

On January 5th, the Wall Street Journal summarized a statement issued by SEC Chair Mary Jo White on the development of globally accepted accounting standards. White indicated that the SEC should continue to make the development of high-quality, globally accepted accounting rules a priority, but also suggested that the SEC would not take further action on the matter under her tenure as SEC chair.

Other Developments

SEC Announces $5.5 Million Whistleblower Award

On January 6th, the SEC announced that it has awarded $5.5 million to a whistleblower for providing important information directly to the SEC about an ongoing scheme conducted by the company where the whistleblower was employed.

Staff Announcements

On December 22nd, the SEC named Timothy Husson Associate Director in the Division of Investment Management’s Risk and Examinations Office. The SEC also appointed Sara P. Crovitz to serve as Deputy Chief Counsel and Associate Director in the Division of Investment Management’s Chief Counsel’s Office. On December 21st, the SEC announced that it has appointed G. Jeffrey Boujoukos to serve as Director of its Philadelphia Regional Office, where he will oversee enforcement and examinations in the Mid-Atlantic region. Boujoukos will replace Sharon B. Binger, who announced her plans to leave the SEC by the end of 2016.

SEC Issues Annual Reports on Credit Rating Agencies

On December 21st, the SEC announced the publication of two annual staff reports on the impact of the SEC’s oversight of nationally recognized statistical rating organizations (“NRSROs”). The annual examination report, required by the Dodd-Frank Act, summarizes the staff’s findings from the most recently completed examinations of each NRSRO, which found that NRSROs continue to integrate and enhance internal systems and processes to comply with their obligations as regulated entities. The annual report, mandated by the 2006 Credit Rating Agency Reform Act, discusses the state of competition, transparency, and conflicts of interest at NRSROs.

Money Market Fund Statistics

On December 16th, the SEC published updated money market fund statistics. The updated statistics include data as of November 30, 2016.

Commodity Futures Trading Commission

Proposed Rules

Position Limits for Derivatives

On December 30th, the CFTC re-proposed rules to amend part 150 of its regulations concerning speculative position limits to conform to the Dodd-Frank Act amendments to the Commodity Exchange Act. The re-proposal would establish speculative position limits for 25 exempt and agricultural commodity futures and option contracts, and physical commodity swaps that are “economically equivalent” to these contracts. In connection with establishing these limits, the CFTC is re-proposing to update some relevant definitions; revise the exemptions from speculative position limits, including for bona fide hedging; and extend and update reporting requirements for persons claiming exemption from these limits. Comments on this re-proposal must be received by February 28, 2017.

Capital Requirements of Swap Dealers and Major Swap Participants

On December 16th, the CFTC proposed to adopt new regulations and to amend existing regulations to implement sections 4s(e) and (f) of the Commodity Exchange Act. Section 4s(e) requires the CFTC to adopt capital requirements for swap dealers (‘‘SDs’’) and major swap participants (‘‘MSPs’’) that are not subject to capital rules of a prudential regulator. Section 4s(f) requires the CFTC to adopt financial reporting and recordkeeping requirements for SDs and MSPs. The CFTC also proposed to amend existing capital rules for futures commission merchants (‘‘FCMs’’), providing specific capital deductions for market risk and credit risk for swaps and security-based swaps entered into by an FCM. The CFTC additionally proposed several technical amendments to the regulations. Comments on the proposals must be received by March 16, 2017.

No-Action Relief

No-Action Relief Issued for DCOs and Other Reporting Entities from Certain Obligations on Cleared Swap Reporting

On December 19th, the CFTC’s Division of Market Oversight (“DMO”) announced time-limited no-action relief to derivatives clearing organizations (“DCOs”) and reporting entities for certain swaps reporting obligations amended by a CFTC Final Rule published on June 27, 2016.

No-Action Relief Issued for Entities Submitting Swaps for Clearing with DCOs Acting under Exemptive Orders or No-Action Relief

On December 19th, the DMO announced time-limited no-action relief to entities submitting swaps for clearing by derivatives clearing organizations operating under CFTC exemptive orders or no-action relief provided by CFTC staff.

Other Developments

Chairman Timothy Massad Announces Resignation

On January 3rd, Chairman Timothy G. Massad announced that he has tendered to President Obama his resignation as CFTC Chair, effective on January 20, 2017.

Staff Interpretation Regarding Political Contributions by Swap Dealers

On December 23rd, the CFTC’s Division of Swap Dealer and Intermediary Oversight (“Division”) issued an interpretation of Regulation 23.451, which imposes certain limitations relating to political contributions made by swap dealers. This interpretation clarifies the Division’s view that a swap dealer’s contributions for transition or inaugural expenses incurred by a successful candidate are only covered by the rule to the extent that such expenses are incurred by a successful candidate for a position as an official of a governmental Special Entity.

Federal Rules Effective Dates

January 2017 – March 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Bats Global Markets

SEC Approves EDGX’s Price Improvement Auction

On January 3rd, the SEC granted accelerated approval to Bats EDGX Exchange Inc.’s (“EDGX”) proposal for its equity options platform (“EDGX Options”) to adopt a price improvement auction, the Bats Auction Mechanism. The SEC also requested comments on EDGX’s amendment to the proposed rule change, which, among other things, provides explanation and justification of certain aspects of the proposal, including additional examples describing the Auction processing and order allocation in various scenarios and details regarding the handling of overlapping Auctions for 50 contracts or more. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 9, 2017. SEC Release No. 34-79718.

Chicago Board Options Exchange

SEC Approves Changes to C2’s Rules on Opening and Closing Rotations for Series Trading. On January 5th, the SEC approved C2 Options Exchange Incorporated’s (“C2”) proposed rule change to amend its rules relating to the opening and closing of series for trading on C2 to reorganize and simplify the rules and to more accurately reflect current System functionality. SEC Release No. 34-79743.

Financial Industry Regulatory Authority

FINRA Reveals 2017 Priorities

As describe further in this week’s Insights from Winston & Strawn, on January 4th, the Financial Industry Regulatory Authority (“FINRA”) released its Annual Regulatory and Examination Priorities Letter, which offers information about the areas FINRA intends to review in its 2017 exams. FINRA highlighted several key areas in its list of priorities, which include high-risk and recidivist brokers; protecting senior investors; financial risks, including liquidity and risk management; operational risks, including cybersecurity and supervisory controls; and market integrity, including manipulation and best execution. FINRA also announced the launch of an electronic, off-site review program, which will allow FINRA to make targeted information requests to firms and then analyze responses off site.

FINRA Prepares Members for Changes to Arbitration Procedures

FINRA published three Regulatory Notices on January 3rd that notify members of the effective dates of several amendments to its Codes of Arbitration Procedures. The rule amendments expanding chairperson eligibility in arbitration will apply to all chairperson applicants as of January 9, 2017.  The rule amendments that add additional grounds for arbitrators to act on motions to dismiss prior to the conclusion of the claimant’s case in chief will apply to motions to dismiss filed on or after January 23, 2017. The rule amendments that require most parties to use the FINRA Office of Dispute Resolution’s Party Portal to file initial statements of claim and to file and serve most pleadings and other documents on FINRA or any other party will become effective for all cases filed on or after April 3, 2017.

FINRA Announces Election Results and Recent Appointments for Vacancies on SFAB, NAC and District Committees

In an Election Notice published on December 20th, FINRA announced the results of elections to fill vacancies on the Small Firm Advisory Board (“SFAB”) and district committees. FINRA also announced the individuals appointed by FINRA to serve on the SFAB, the district committees and the National Adjudicatory Council (“NAC”).

International Securities Exchange

ISE Exchanges’ Proposed Changes to Response Times for Block Trades Gain SEC Approval

On January 4th, the SEC issued an order approving International Securities Exchange LLC’s (“ISE”),  ISE Mercury LLC’s (“ISE Mercury”), and  ISE Gemini LLC’s (“ISE Gemini”) separately filed proposals to amend their respective rules to modify the response times in the Block Order Mechanism, Facilitation Mechanism, Solicited Order Mechanism, and Price Improvement Mechanism (“PIM”) from 500 milliseconds to a time period designated by the exchanges of no less than 100 milliseconds and no more than 1 second.

International Swaps and Derivatives Association

ISDA Adds Japanese Module to ISDA Resolution Stay Jurisdictional Modular Protocol

On January 5th, the International Swaps and Derivatives Association (“ISDA”) released a Japanese jurisdictional module to the ISDA Resolution Stay Jurisdictional Modular Protocol. The new Japanese jurisdictional module will allow market participants to comply with amendments to the Comprehensive Guidelines issued by the Japanese Financial Services Agency regarding contractual stays in financial contracts governed by non-Japanese law, which will become effective on April 1, 2017. ISDA Press Release.

ISDA Issues Updated OTC Derivatives Compliance Calendar

On December 27th, ISDA published an updated version of its OTC Derivatives Compliance Calendar.

ISDA Examines Derivative Market Trends in New Research Note

On December 20th, ISDA published a research note that analyzes the effects of clearing and compression on interest rate derivatives (“IRD”) by adjusting the IRD notational outstanding data reported by the Bank for International Settlements (“BIS”) in order to provide a clearer estimate of derivative market trends. The report concludes that that approximately 98% of the clearable IRD market is currently cleared.

Municipal Securities Rulemaking Board

MSRB Publishes Annual Report and Financial Statements for 2016

On January 6th, the Municipal Securities Rulemaking Board (“MSRB”) released its 2016 Annual Report, which provides an overview of its initiatives to increase fairness, transparency and efficiency in the municipal securities market. The MSRB’s report also includes a link to the MSRB’s audited financial statements, which include financial information for the fiscal year that ended on September 30, 2016. MSRB Press Release.

National Futures Association

NFA Prepares FDMs for Requirements to Provide Customers with Transaction Execution Data.

On January 5th, the National Futures Association (“NFA”) published a Notice to Members that provides information about amendments to NFA Compliance Rule 2-36, which requires forex dealer members (“FDMs”) to provide customers with certain transaction execution data upon request, to notify customers of their ability to request this transaction information, and to report customer requests and their response to the NFA. The amendment will be effective on March 31, 2017.

NFA Announces Details of Annual Meeting of Members

On December 29th, the NFA announced that it will hold its Annual Meeting of Members on February 7, 2017. The agenda of the meeting includes, among other things, the election of an individual to the NFA Board of Directors from the top 5% of commodity pool operators (“CPOs”) or commodity trading advisors (“CTAs”) reporting any funds under management allocated to futures and swaps.

NFA Updates Forex Transactions Regulatory Guide

On December 23rd, the NFA published a revised version of its regulatory guide for Forex transactions. The revised guide incorporates technical amendments to NFA Bylaw 1507 Definitions and NFA Requirements to conform to the definitions in Section 1a of the Commodity Exchange Act, and adds references to recent Notices to Members regarding minimum security deposits requirements.

NFA Offers Guidance on New Requirements for CPOs and CTAs to Report Financial Information

On December 19th, the NFA issued a Notice to Members that offers guidance on new reporting requirements under NFA Compliance Rule 2-46, which will require CPOs and CTAs to report two financial ratios regarding a CPO’s or CTA’s financial condition on the quarterly Forms PQR and PR. The new requirements will be effective for Forms PQR and PR as of the quarter ending June 30, 2017.


Phlx Proposes to Modernize Rules on Options Trading and Specialists

On January 3rd, the SEC requested comments on a proposal filed by NASDAQ PHLX LLC (“Phlx”) to update and modernize its Series 500 Rules to reflect changes to the way options trading is now conducted on the Exchange, as a hybrid system that is largely electronic and off-floor but continues to have an on-floor specialist and an open outcry trading floor. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 9, 2017. SEC Release No. 34-79724.


NYSE Advises Members of Changes to Applicable Price Range under Rule 15

In an Information Memo published on January 4th, the New York Stock Exchange LLC (“NYSE”) advised members of amendments to its rules that establish requirements for Designated Market Makers  to publish preopening indications if the opening transaction is anticipated to be at a price that represents a change of more than the “Applicable Price Range” from a specified “Reference Price” before the security opens. Effective January 3, 2017, the Applicable Price Range for securities with a Reference Price $3.00 and lower will be $0.15 ($0.30 during extreme market-wide volatility).

SEC Takes More Time to Consider NYSE Exchanges’ Proposal on Unlimited Trading Privileges

On January 4th, the SEC designated March 1, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE MKT LLC’s (“NYSE MKT”) proposal to allow it to trade pursuant to unlisted trading privileges (“UTP”) for any NMS Stock listed on another national securities exchange; establish rules for the trading pursuant to UTP of exchange-traded products; and adopt new equity trading rules relating to trading halts of securities traded pursuant to UTP on the Pillar platform. On January 4th, the SEC designated March 11, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding a related proposal filed separately by NYSE.

SEC Approves NYSE Exchanges’ New Order Entry Platform

On January 3rd, the SEC issued orders approving NYSE Arca, Inc.’s (“NYSE Arca”) and NYSE MKT’s separately filed proposals to amend their respective rules to introduce NYSE OptX, an order entry platform that will allow for the submission of Qualified Contingent Cross orders by certain persons and entities, including Options Trading Permit  Holders, OTP Firms and ATP Holders.

NYSE Arca’s Proposal to Widen Auction Collars Gains SEC Approval

On December 30th, the SEC issued an order approving NYSE Arca’s proposed rule change to widen Auction Collars for the Core Open Auction on volatile trading days. SEC Release No. 34-79714.

Judicial Developments

SLUSA Does Not Provide Independent Basis for Federal Question Jurisdiction

Plaintiff, a shareholder of Archon Corp.’s preferred stock, appealed the district court's dismissal of his class action suit against Archon Corp. for breach of contract under Nevada Law in which he claimed Archon improperly calculated the redemption price of shares of preferred stock. Plaintiff argued that the Securities Litigation Uniform Standards Act ("SLUSA") provides a basis for the district court's federal question jurisdiction. On December 21st, the U.S. Court of Appeals for the Ninth Circuit affirmed dismissal, holding that plaintiff failed to assert a federal claim and SLUSA does not create an independent basis for federal question jurisdiction over plaintiff's state law claim. David Rainero v. Archon Corp.

Court Rejects Broker-Dealer's Attempt to Sidestep FINRA Disciplinary Proceeding

After FINRA brought a disciplinary proceeding against them for selling unregistered securities in violation of the Securities Act, Scottsdale Capital Advisors sought an injunction in federal court, claiming the proceeding is unauthorized because FINRA may only discipline members for violations of the Securities Exchange Act. On December 20th, the U.S. Court of Appeals for the Fourth Circuit affirmed the district court's dismissal, holding that FINRA's interpretation of its authority to charge its members with violations of the Securities Act is plausible and Scottsdale can obtain meaningful judicial review following the appeal process outlined in the Exchange Act. Scottsdale Capital Advisors v. FINRA

Industry News

U.S. Banks Are Getting Ready to Fight the Volcker Rule

On January 4th, Reuters reported that big U.S. banks are gearing up to get Congress to loosen or completely eliminate Dodd-Frank’s Volcker rule. Lobbyists are reportedly planning to present evidence to Congress that the Volcker rule is actually bad for companies, investors, and the U.S. economy. According to lobbyists, banks are now seeing opportunities to unravel reforms under Trump’s administration and the incoming Republic-led Congress, which seem to be more business-friendly.