Insights from Winston & Strawn
BE-180 Filing Requirement
Every five years, the U.S. Department of Commerce Bureau of Economic Analysis (“BEA”) conducts a benchmark survey of the financial services purchased/sold between U.S. financial services providers and foreign persons. The 2015 report is more expansive in coverage and requires all U.S. financial services providers whose combined sales or combined purchases with foreign persons exceeded $3,000,000 to fill a BE-180. For most U.S. entities subject to the filing, the deadline is November 1, 2015, although extensions may be requested.
Please see our more detailed client briefing available here for additional information.
SEC Cybersecurtity Risk Alert Last week the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert concerning the agency’s cybersecurity examination initiative which is covered in additional detail directly below.
Feature: Cybersecurity Risk Alert
The Risk Alert follows-up on OCIE’s April 2014 announcement of a series of examinations aimed at identifying cybersecurity risks and assessing cybersecurity preparedness in the securities industry. The 2015 Risk Alert provides information on the areas of focus for the second round of cybersecurity examinations of broker-dealers and investment advisers. These examinations will involve more testing to assess implementation of firm procedures and controls and will focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
The Risk Alert includes a sample list of the processes OCIE may review during an examination, although the exact validation and testing will vary depending on the specific circumstances presented by each firm’s business model, systems, and information technology environment. Among other things, the governance and risk assessment may seek information on the efforts a firm has made to protect client information, its cybersecurity organizational structure, and its policies and procedures related to penetration testing. In addition, OCIE examiners may review board minutes and briefing materials regarding cyber-related risks, cybersecurity incident response planning, actual cybersecurity incidents, and cybersecurity-related matters involving vendors.
A review of a firm’s access rights and controls may include an inspection of a firm’s policies and procedures related to: employee access; the use of multi-factor authentication; log-in attempts and failures; violations of firm policies; and any internal audits of access rights. OCIE examiners may also request information related to instances in which system users, including employees, customers, and vendors, received entitlements or access to firm data, systems, or reports in contravention of the firm’s policies or practices. In addition, an inspection may review firm policies and procedures regarding devices used to access the firm’s system externally and firm policies and procedures related to verification of the authenticity of customer requests to transfer funds.
The assessment of firm policies and procedures related to enterprise data loss prevention may include a review of (i) a firm’s data mapping, with particular emphasis on understanding information ownership and how the firm documents or evidences personally identifiable information and (ii) the systems, utilities, and tools used to prevent, detect, and monitor data loss as it relates to personally identifiable information. OCIE examiners may also inspect firm policies and procedures related to monitoring exfiltration and unauthorized distribution of sensitive information outside of the firm.
In reviewing a firm’s third-party vendor policies and procedures, examiners may review (i) how a firm conducts its due diligence of vendors; (ii) a firm’s policies and procedures for contract review; and (iii) its contingency plans for conflicts of interest, bankruptcy, or other issues that might put the vendor out of business or in financial difficulty.
An OCIE examination of a firm’s training will consider the information the firm provides to its employees regarding information security and risks, including the training method (e.g., in person, computer-based learning, or email alerts); and the information the firm provides to third-party vendors or business partners.
Finally, the review of firm incident response policies and procedures or the firm’s business continuity of operations plan may seek information regarding: the firm’s process for conducting tests or exercises of its incident response plan; system-generated alerts related to data loss; incidents of unauthorized internal or external distributions of personal information; successful unauthorized internal or external incidents; and the firm’s cybersecurity insurance coverage.
View the full Risk Alert here.
Banking Agency Developments
OCC to Host Workshop for Directors in Chicago
On September 17th, the Office of the Comptroller of the Currency (“OCC”) announced that it will hold a workshop in Chicago next month for directors of national community banks and federal savings associations. The Building Blocks for Directors workshop will be held October 26-28, and will review the OCC’s approach to supervision by providing information on directors’ duties and responsibilities, major laws and regulations, and the examination process. OCC Press Release.
FDIC Vice Chair Rebuts Arguments to Weaken Leverage Ratio for Derivatives
On September 16th, Federal Deposit Insurance Corporation (“FDIC”) Vice Chair Thomas M. Hoenig delivered remarks to the Exchequer Club of Washington, DC, in which he cautioned against recent proposals to weaken leverage capital requirements for derivatives for large banking organizations, both within the U.S. and globally in respect to the Basel III leverage ratio. Hoenig addressed various arguments that the leverage ratio is a threat to the clearing of derivatives. Hoenig emphasized the need for strong capital requirements and the leverage ratio in protecting the financial system by maintaining a strong check on excessive debt financing. Hoenig Remarks.
FDIC Seminars on Deposit Insurance Coverage
On September 14th, the FDIC published a Financial Institutions Letter announcing it will conduct four identical live seminars on FDIC deposit insurance coverage for bank employees and officers. The seminars will be conducted online between September 24 and December 2, 2015. Additionally, the FDIC has posted three separate deposit insurance coverage seminars on the FDIC’s You Tube channel that address fundamentals of deposit insurance coverage, deposit insurance coverage rules for informal and formal revocable trust accounts, and advanced topics in deposit insurance coverage. FDIC FIL-38-2015.
Treasury Department Developments
CFPB Releases Know Before You Owe Online Tools
On September 17th, the Consumer Financial Protection Bureau (“CFPB”) released new online tools as part of its Know Before You Owe initiative. The tools provide an interactive overview of the mortgage process for prospective homebuyers, assist homebuyers in determining how much they can afford to spend on a home, and allow consumers to familiarize themselves with the new Know Before You Owe forms, which creditors will be required to provide beginning October 3, 2015. CFPB Press Release. The CFPB also published a press kit, which includes sample documents, photos, and infographics to help explain the Know Before You Owe forms visually. CFPB Press Kit.
OFR Studies Relationship between Market Structure and Prices under Stress
On September 16th, the Treasury Department’s Office of Financial Research (“OFR”) published a working paper exploring the relationship between sharp price declines and market liquidity. The paper suggests that funding constraints of market makers and the slow reaction of liquidity providers contribute to sharp price declines, as evidenced in the 2010 Flash Crash and recent U.S. Treasury market volatility. OFR researchers created an agent-based model to mimic the behavior of market participants in response to market conditions, finding that the absence of a market-maker or liquidity supplier caused an increase in market impact. OFR Press Release.
CFPB Publishes Updates to TILA RESPA Examination Procedures
On September 15th, the CFPB released updated guidance documents detailing examination procedures for mortgage origination, Truth in Lending Act (“TILA”), and Real Estate Settlement Procedures Act (“RESPA”) exams. The updated TILA and RESPA examination procedures will apply to examinations after the October 2015 effective date for the TILA RESPA Integrated Disclosures final rule and amendments.
Securities and Exchange Commission
SEC Removes References to Credit Ratings in Money Market Rules
On September 16th, the SEC adopted amendments related to the removal of credit rating references in Rule 2a-7, the principal rule that governs money market funds, and Form N-MFP, the form that money market funds use to report information to the SEC each month about their portfolio holdings, under the Investment Company Act of 1940. The amendments will implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). In addition, the SEC adopted amendments to Rule 2a-7’s issuer diversification provisions to eliminate an exclusion from these provisions that is currently available for securities subject to a guarantee issued by a non-controlled person. The amendments will be effective 30 days after publication in the Federal Register, which is expected during the week of September 21. The compliance date is October 14, 2016. SEC Release No. IC-31828. See also SEC Press Release.
SEC Adopts Revisions to the EDGAR Filer Manual and Related Rules to Reflect Updates to the EDGAR System
On September 15th, the SEC adopted revisions to the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) Filer Manual and related rules to reflect updates to the EDGAR system. The revisions and rules are effective upon publication in the Federal Register. SEC Release Nos. 33-9911; 34-75918, 39-2506, IC-31823.
Division of Corporation Finance Issues CDI on Regulation AB Asset-Level Disclosure Date
On September 16th, the SEC’s Division of Corporation Finance issued new Compliance and Disclosure Interpretation 311.02 regarding Item 1111 of Regulation AB, the asset-level disclosure compliance date. CDI 311.02.
Order Extending Certain Temporary Exemptions Related to Securities-Based Swaps
On September 15th, the SEC extended its June 15, 2011 order granting temporary exemptions and exceptions from compliance with certain provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) applicable to security-based swaps (“SB swaps”), that were amended or added by the Dodd-Frank Act. The 2011 order provided, among other things, a temporary exemption from Section 3E(f) of the Exchange Act for security-based swap dealers and major security-based swap participants (together, “SBS Entities”), a temporary and limited exception from Section 15F(b)(6) of the Exchange Act with respect to persons then currently associated with SBS Entities, and temporary exemptions from Section 29(b) of the Exchange Act with respect to violations of Sections 3E(f) and 15F(b)(6) in connection with SB swap contracts entered into on or after July 16, 2011. The Commission is extending the exemption from Section 3E(f) and exception from Section 15F(b)(6) until the compliance date of rules that establish a process by which SBS Entities can register (and withdraw from registration) with the Commission. In addition, the Commission is specifying when the related exemption for Section 29(b) with respect to SB swap contracts that involve violations of Sections 3E(f) or 15F(b)(6) will expire. SEC Release No. 34-75919.
SEC Grants Aegis Capital Corp. Rule 506 Waiver Request
On September 14th, the SEC granted Aegis Capital Corp.’s request for a waiver from disqualification under Rule 506(d)(2)(ii) of Regulation D. Aegis Capital Corp. made the request following the suspension of its principal after he entered into a settlement agreement with the Financial Industry Regulatory Authority (“FINRA”) for failing to disclose tax liens on his Form U-4. SEC No-Action Letter.
Speeches and Testimony
Chief Accountant Addresses AICPA Conference
On September 17th, SEC Chief Accountant James Schnurr discussed his office’s key priorities which include: the implementation of the new revenue recognition standard, the upcoming release of the Financial Accounting Standard Board’s new credit impairment standard, and current thinking with respect to International Financial Reporting Standards. Schnurr Remarks.
Deputy Chief Accountant Discusses Revenue Recognition
On September 17th, SEC Deputy Chief Accountant Wendy R. Bricker discussed her office’s efforts to navigate towards a more principles-based approach to revenue recognition. Bricker Remarks.
Director, Division of Enforcement Testifies on Updating the Electronic Communications Privacy Act
On September 16th, Andrew Ceresney, Director of the SEC’s, Division of Enforcement, testified before the Committee on the Judiciary concerning the pending Electronic Communications Privacy Amendments Act (“ECPA”). Director Ceresney noted that while he shares in the goal of updating ECPA’s evidence collections procedures and privacy protections to account for the digital age, the pending amendment poses significant risks to the American public by impeding the ability of the SEC and other civil law enforcement agencies to investigate and uncover financial fraud and other unlawful conduct. Ceresney Testimony.
Commissioner Aguilar Makes Public Statement on Finishing the Work of Regulating Security-Based Derivative
On September 15th, Commissioner Luis A. Aguilar made a public statement about the rules to regulate the security-based swap (“SBS”) market. Commissioner Aguilar stated that the SEC is again compelled to issue another exemption and exception affecting SBS intermediaries because it has not yet adopted all of the necessary rules to implement the main components of Title VII of the Dodd-Frank Act dealing with SBS intermediaries. Specifically, the SEC needs to extend a temporary exemption for SBS dealers and major SBS participants from the segregation and margin provisions under the Exchange Act. In addition, the SEC is extending a separate temporary exception from rules that would prohibit SBS dealers or major participants from allowing certain disqualified persons to effect SBS transactions on their behalf. These temporary extensions are tied to the compliance date of registration rules for SBS dealers and major participants, as well as other essential Title VII rules. Commissioner Aguilar noted that these temporary extensions are necessary to prevent, among other things, unwarranted market disruptions caused by regulatory uncertainty. Aguilar Public Statement.
Chair White Supports Shortened Settlement Cycle
On September 16th, SEC Chair Mary Jo White wrote Kenneth E. Bentsen, Jr., President and Chief Executive Officer of the Securities Industry and Financial Markets Association, and Paul Schott Stevens, President and Chief Executive Officer of the Investment Company Institute. White expressed strong support for industry efforts to shorten the settlement cycle from the third business day after the trade date to no later than the second business day ("T+2"). In order to provide the market with timely regulatory certainty with respect to these changes, White has directed SEC staff to work closely with the self-regulatory organizations (“SROs”) to develop detailed schedules to consider the necessary rule amendments implementing a shortened settlement cycle. White asked the SROs to finalize these implementation schedules by October 31, 2015. White has also instructed SEC staff to develop a proposal to amend SEC Rule 15c6-1(a) to require settlement no later than T + 2. White Letter.
SEC In-House Judge May Weaken Justice Department Argument
On September 16th, Wayne State University law professor Peter J. Henning, writing for DealBook, noted how a recent SEC Administrative Law Judge (“ALJ”) ruling may weaken the U.S. Justice Department’s efforts to overturn the Second Circuit’s decision in U.S. v. Newman, which dismissed an insider trading indictment because prosecutors failed to prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and did so in exchange for a personal benefit. Weakened Stance.
The SEC will hold an Open Meeting on September 22, 2015 to consider whether to propose a new rule and amendments to certain rules and forms that would provide for liquidity risk management programs and related disclosures for open end management investment companies. Sunshine Act Notice.
Equity Market Structure Advisory Committee Meeting Postponed
The SEC’s Equity Market Structure Advisory Committee provided notice of the postponement of its September 24, 2015 public meeting. Updated information will be posted once a new meeting date is confirmed.
Commodity Futures Trading Commission
CFTC Commissioner Calls for Greater Transparency in Market Maker Programs
On September 17th, Bloomberg summarized the remarks of Commodity Futures Trading Commission (“CFTC”) Commissioner Sharon Y. Bowen before the International Swaps and Derivatives Association (“ISDA”) North America Conference. In her speech, Commissioner Bowen called for greater transparency by exchanges regarding the incentives they offer to attract market makers, including high speed traders, to use interest rate, energy and other contracts on their markets. Bowen also urged greater transparency of self-trades in which a high-speed trading firm trades with itself, which Bowen characterized as creating “phantom liquidity.” Bowen argued that increased regulation in these areas is necessary as the presence of electronic trading increases in the market, bringing with it new potential for illegal activity and market volatility. Market Maker Transparency.
CFTC Proposes Change to Definition of Material Terms for Purposes of Swap Portfolio Reconciliation
On September 15th, the CFTC proposed an amendment to the regulatory definition of the “material terms” for which counterparties must resolve discrepancies when engaging in portfolio reconciliation. The proposed amendments would exclude certain data fields from the definition of “material terms,” superseding the no-action relief granted by CFTC Staff Letter 13-31 if adopted. CFTC Press Release. See also CFTC Chair Timothy Massad’s statement in support of the proposed amendment. CFTC Commissioner J. Christopher Giancarlo applauded the proposed amendment as an appropriate step to address “flawed Dodd-Frank rulesets” and subject no-action relief to cost-benefit analysis and public comment, but raised concerns regarding the costs and burdens placed on market participants by certain elements of the proposed amendments. Giancarlo statement.
Agricultural Advisory Committee Meeting
On September 14th, the CFTC announced a public meeting of its Agricultural Advisory Committee on September 22, 2015. The meeting will focus on topics related to speculative position limits for agricultural commodities and other agricultural market matters. CFTC Press Release.
Federal Rules Effective Dates
September 2015 - November 2015
Click here to view table.
Exchanges and Self-Regulatory Organizations
FINRA to Propose Financial Exploitation Protection Rule
On September 17th, FINRA announced its Board of Governors has approved the proposal of a rule aimed at better protecting seniors and other vulnerable adults from financial exploitation. The proposal would allow a firm to place a temporary hold on a disbursement of funds or securities and notify a customer's trusted contact when the firm has a reasonable belief that financial exploitation is occurring. The new FINRA rule would not create a duty to place temporary holds on disbursements. Rather, it would provide firms with a safe harbor when they exercise discretion in placing temporary holds on disbursements. FINRA plans to issue a Regulatory Notice soliciting comment on this proposal within the next several weeks. FINRA Press Release.
ISDA Launches Derivatives Identification Initiative
On September 17th, the International Swaps and Derivatives Association (the “ISDA”) announced the launch of a new industry data project aimed at developing an open-source standard derivatives product identification system that can be applied across all derivatives facilities, including trading venues, clearing houses, repositories and other infrastructures. ISDA Press Release.
Disapproval Proceedings Instituted for Proposed Data Feed Changes
On September 17th, the SEC instituted proceedings to determine whether to approve or disapprove the New York Stock Exchange’s (the “NYSE”) and NYSE MKT’s individually submitted proposals to amend the data content of their respective proprietary market data feeds: NYSE Trades and NYSE MKT Trades (collectively, the “Trades Feeds”). The Trades Feeds currently provide subscribers and users, on a real-time basis, with the same last-sale information that each Exchange reports to the Consolidated Tape Association (“CTA”) for inclusion in the CTA Plan’s consolidated data streams. The NYSE and NYSE MKT now propose to distribute their last-sale information on their respective Trades Feed in a different manner than they distribute last-sale information to the CTA. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of September 21. Rebuttals should be submitted within 35 days. SEC Release No. 34-75937.
ETF Fixes Considered
On September 17th, Bloomberg discussed the efforts the SEC and stock exchanges are making to reduce disruptions in the trading of exchange-traded funds (“ETF”). ETF pricing diverged wildly from quotes for their underlying portfolio stocks on August 24, 2015, leading to repeated trading halts that day. ETF Efforts.
IEX Seeks National Registration
On September 15th, the SEC provided notice of Investors’ Exchange, LLC’s (“IEX”) application seeking registration as a national securities exchange. SEC Release No. 34-75925.
FINRA Publishes Notice to Provide Guidance on Liquidity Risk Management Practices
On September 15th, FINRA published a Regulatory Notice to provide guidance on effective practices that senior management and risk managers at firms should consider and implement. FINRA Regulatory Notice 15-33.
Longer Period Designated for Consideration of CBOE Market Maker Proposal
On September 14th, the SEC designated November 18, 2015 as the date by which it will approve or disapprove the Chicago Board Options Exchange’s (the “CBOE”) proposed amendment regarding the solicitation of MarketMakers as the contra party to an agency order entered into the CBOE’s Automated Improvement Mechanism and Solicitation Auction Mechanism auctions. SEC Release No. 34-75908.
Class Definition in Argentina Sovereign Debt Suit Must Be Ascertainable
On September 16th, the U.S. Court of Appeals for the Second Circuit reversed a district court order modifying the class definition in a lawsuit against the Republic of Argentina after it defaulted on between $80 and $100 billion of sovereign debt. Bondholders sued Argentina for refusing to meet its bond payment obligations. Argentina challenged an order entered by the district court modifying the class definition by removing the continuous holder requirement and expanding the class to all holders of beneficial interests in the bonds without limitation as to time held. The appellate court reversed and remanded, holding the district court erred in modifying the class because the modified class definition failed to meet the ascertainability requirement of Federal Rules of Civil Procedure Rule 23. The class definition’s use of objective criteria on its own is inadequate to establish the distinct boundaries of a readily identifiable class. The court noted that secondary trading on the bond market would render the objective criteria of holding a beneficial interest impossible to determine. Brecher v. Republic of Argentina.
Appellate Court Temporarily Rescues Tilton from SEC Enforcement Proceeding
On September 17th, the Second Circuit issued a temporary stay in the SEC’s proceedings against Lynn Tilton, according to a report in Reuters. The SEC brought an administrative enforcement proceeding against Tilton, alleging that Tilton and her company Patriarch Partners withheld information regarding the poor performance of assets underlying their collateralized loan obligation funds. Tilton objected to the in-house proceeding on the grounds that the appointment of the SEC’s ALJs is unconstitutional, an argument rejected by a federal court in June. The appellate court issued the temporary stay while it considers Tilton’s appeal. Temporary Stay.
Rep. Cummings Requests More Information Regarding SEC Waiver Process
On September 17th, MarketWatch reported that SEC Chair Mary Jo White is under increased congressional pressure to provide a more detailed explanation of the waiver process for banks guilty of criminal misconduct. In a letter to Chair White, Representative Elijah Cummings of Maryland questioned recent waivers granted to banks that pleaded guilty to criminal charges related to the manipulation of the foreign exchange markets and asked Chair White to explain the evaluation process for these waivers. Representative Cummings requested additional information regarding all waiver requests processed by the SEC after a statement by SEC Commissioner Luis A. Aguilar indicated that the SEC commissioners had little knowledge of the majority of waiver requests received by the SEC, which are handled by SEC staff pursuant to delegated authority. Waiver Requests.
Corporate Insiders Benefit from 8-K Trading Gap
On September 16th, CFO.com reported the findings of a study of corporate insider purchases and sales conducted by researchers at Harvard and Columbia University. The researchers concluded that the SEC’s rules allowing companies up to four days to file Form 8-K have created a trading gap in which corporate insiders make “meaningful” profits by trading in public company stock prior to the release of a significant development. Although researchers noted that their findings did not necessarily indicate misconduct, the study recommends that firms consider extending trading blackout periods and regulators consider the effect their rules have in creating opportunities for insiders to take advantage of trading ahead of significant 8-K disclosures. Trading Gap.
Senator, Coalition Argue Dark Pools Need Increased Regulatory Scrutiny and Guidance
On September 15th, Reuters summarized the findings of a report by the Healthy Markets Association on the need for increased regulation of dark pools. The report recommends new rules that would require dark pools to make higher quality disclosures, reduce conflicts of interest, and follow requirements to offer efficient execution of customer trades at the best price. The report also criticizes the SEC’s regulatory and enforcement efforts in response to dark pools, claiming the agency has been slow to implement needed reforms and has failed to hold dark pools sufficiently accountable for the harm they have caused investors. Dark Pools. On September 15th, MarketWatch reported that Senator Mark Warner will continue to push the SEC to issue policy guidance to dark pools, especially in the wake of recent enforcement actions against dark pools for disclosure violations. Warner.
Warren Withdraws Endorsement of Republican Bill Preventing Liquidation of Fannie Mae Preferred Shares
On September 14th, Bloomberg reported that Senator Elizabeth Warren will pull her support from a bill that would prevent the Treasury Department from selling Fannie Mae and Freddie Mac preferred shares until Congress passes housing-finance reforms. According to the article, Warren objected to a provision which would allow guarantee fees to be used to cover government spending, which she feared could be passed along to low-income borrowers by lenders. The bill would prevent hedge funds from receiving payment for Fannie Mae and Freddie Mac shares they purchased as long-shot bets. Fannie Shareholder Bill.