Insights from Winston & Strawn

China and Australia recently signed the China–Australia Free Trade Agreement (ChAFTA) after ten years of negotiations. Upon full implementation of ChAFTA, which is expected to be the end of this year, 95 percent of Australian exports to China will be tariff­free, and 99.9 percent of Australia’s resources, energy and manufacturing exports to China will be tariff­ free. In addition, China has offered Australia services exporters, including Australian banks, insurers, securities and futures companies, legal and other professional services providers, favorable commitments in market access. It has also accorded Australia the much­coveted “most favored nation” status, ensuring that any future favorable treatment extended by China to other trade partners in certain service sectors will flow automatically to Australia. This presents significantly enhanced opportunities for Australian investment managers in providing investment management services to Chinese clients and accessing Chinese investments.

Furthermore, ChAFTA will facilitate cross­border investment between the two countries. Upon full implementation of ChAFTA, the Australian government will no longer screen investment by private Chinese investors in non­ sensitive sectors below A$1,094 million. The Investor­State Dispute Settlement mechanism also will allow both Chinese and Australian investors to bring a claim in an international tribunal to protect their investments from discriminatory treatment.

Further information on ChAFTA can be found on the Australian Government Department of Foreign Affairs and Trade website at

Joshua Yang

Feature: Compliance Developments

Commissioner Daniel Gallagher of the Securities and Exchange Commission (“SEC”) recently reiterated his worries concerning the agency’s institution of enforcement action against legal and compliance personnel. In his most recent statement, Gallagher explains why he voted against two settled SEC enforcement actions involving alleged violations of Investment Advisers Act Rule 206(4)­7 by chief compliance officers (“CCOs”). He feels that, “Actions like these are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that, under Rule 206(4)­7, is the responsibility of the adviser itself.”

Gallagher calls upon the SEC to consider amendments or at least guidance to clarify roles and responsibilities of compliance personnel, noting that the only guidance market participants have at the moment is enforcement actions, “which in some cases have unfairly contorted the rule to treat the compliance function as a new business line, with compliance officers assuming the role of business heads.” Gallagher emphasizes that under Rule 206(4)­7, CCOs administer a firm’s compliance policies and procedures and it is the responsibility of the advisory firm to actually implement those policies and procedures. View Gallagher’s statement here.

Shortly after Gallagher issued this statement, the SEC instituted settled administrative proceedings against an investment adviser and its principles for, among other things, failing to provide a CCO with the resources needed to plan and conduct an effective compliance program. The SEC instituted settled administrative proceedings against Pekin Singer Strauss Asset Management Inc. and its principles for failing to conduct timely annual compliance program reviews in 2009 and 2010 and failing to implement and enforce provisions of its policies and procedures and code of ethics during this same period. The Enforcement Division further alleged that Ronald L. Strauss, Pekin Singer’s President at the time, dedicated insufficient resources to compliance, which contributed substantially to Pekin Singer’s compliance failures. Among other things, the SEC order found that respondents failed to make compliance a priority, required Pekin Singer’s CCO to prioritize business responsibilities over compliance, and failed to provide the CCO with requested support and resources. The Enforcement Division further alleged that from 2011 to early 2014, respondents kept or placed a substantial number of their clients in the investor share class of Appleseed Fund, a mutual fund managed by Pekin Singer, when those clients were eligible for the less expensive institutional share class. Without admitting or denying the allegations, respondents settled the matter by agreeing to a cease­and­desist order and associational bars and to the payment of civil penalties. View the enforcement action here.

The Risk & Compliance Journal summarized the findings of a new study of the hallmarks of effective compliance and ethics programs. The study found that compliance programs led by a CCO who also acts as general counsel are the most effective. View the blog post here.

Bloomberg discussed how compliance has become a growth industry but noted that the hefty pay packages CCOs command are tempered by the personal risks these executives may face. The SEC is not the only federal agency to target CCOs. View the article here.

Similarly, the Wall Street Journal recounted the difficulties some firms are encountering as they attempt fill open internal audit positions. View the article here.

The adoption of a “culture of compliance” is frequently encouraged by regulators but rarely explained. The Conglomerate considers what makes people unethical in this blog post.

Banking Agency Developments

OCC Workshops

The Office of Comptroller of the Currency (“OCC”) will hold two workshops in Harrisburg, Pennsylvania on July 28 and 29, 2015. The July 28 workshop will focus on risk governance for directors of national community banks and federal savings associations. The July 29 workshop on credit risk has been revised and updated for 2015. OCC Press Release.

OCC Mortgage Metrics Report

On June 25th, the OCC issued the OCC Mortgage Metrics Report for the first quarter of 2015. Among other things, the report found that the performance of first­lien mortgages serviced by eight national banks improved during the first quarter of 2015. In addition, foreclosure activity among the reporting servicers declined compared with a year earlier. OCC Press Release.

Agencies Issue Flood Insurance Rule

On June 22nd, the Federal Reserve Board (“FRB”), Farm Credit Administration, Federal Deposit Insurance Corporation (“FDIC”), National Credit Union Administration (“NCUA”), and Office of the Comptroller of the Currency (“OCC”) published a joint final rule that modifies the regulations concerning loans secured by properties located in special flood hazard areas. The final rule implements provisions of the Homeowner Flood Insurance Affordability Act of 2014 relating to the escrowing of flood insurance payments and the exemption of certain detached structures from the mandatory flood insurance purchase requirement. The final rule also implements provisions in the Biggert­Waters Flood Insurance Reform Act of 2012 relating to the force placement of flood insurance. Joint Agency Press Release.

FRB Commences Census of Finance Companies

On June 22nd, the FRB announced it is beginning its 2015 Census of Finance Companies. The data regarding the assets and liabilities of finance companies collected through the voluntary census provides a benchmark for the FRB’s monthly reports on finance companies’ outstanding accounts receivable and their sources of funds. The data also assists the FRB in estimating total consumer credit. FRB Press Release.

FRB Finalizes Rule Amending Regulation D

On June 18th, the FRB published amendments to Regulation D (Reserve Requirements of Depository Institutions) regarding the payment of interest on certain balances maintained at Federal Reserve Banks by or on behalf of eligible institutions. Specifically, the amendments permit interest payments on certain balances to be based on a daily rate rather than on a maintenance period average rate. The amendments should help to enhance the role of such rates of interest in moving the Federal funds rate into the target range established by the Federal Open Market Committee, particularly on occasions when changes in those rates do not coincide with the beginning of a maintenance period. The amendments are effective July 23, 2015. FRB Press Release.

Banking Agencies Finalize Advanced Approaches Capital Rules

On June 16th, the OCC, the FRB, and the FDIC released finalized revisions to the capital rules applicable to large, international banking organizations that use the advanced approaches rule to determine their regulatory capital ratios. The final rule will become effective October 15, 2015, and contains corrections and updates elements of the advanced approaches rule, including the calculation requirements for risk­weighted assets for these banking organizations. Joint Agency Press Release.

FDIC Proposes Changes to Assessment Methods for Small Banks

On June 16th, the FDIC requested comment on a proposed rule that would change the way the FDIC assesses small banks with less than $10 billion in assets for deposit insurance. The proposed rule would base the financial ratios method on a statistical model estimating the probability of failure over three years, update the financial measures used in the financial ratios method to make it consistent with the statistical model, eliminate risk categories for established small banks, and use the financial ratios method to determine assessment rates. Comments should be submitted within 60 days after publication in the Federal Registrar, which is expected shortly. FDIC Press Release.

OCC Updates Booklet on Residential Real Estate Lending

On June 15th, the OCC released the “Residential Real Estate Lending Booklet.” Among other things, the revised booklet updates guidance to examiners on assessing the amount of risk and quality of risk management associated with residential real estate lending; includes changes to the functional areas of production, servicing, and collections and foreclosures to reflect recent regulatory changes and lessons learned; and incorporates changes to Regulation X and Z in addition to regulatory changes directed by the Dodd­Frank Act. OCC Press Release.

FDIC Issues Spring Edition of Its Consumer Newsletter

On June 15th, the FDIC published the Spring 2015 issue of “FDIC Consumer News.” The newsletter includes suggestions for teaching young people about money, as well as information regarding computer security for bank customers, changes to credit scoring practices, and a new savings program for children with disabilities. FDIC Press Release.

Treasury Department Developments

CFPB Delays Implementation of Mortgage Disclosure Rule

On June 24th, the Consumer Financial Protection Board (“CFPB”) issued a proposed amendment to the Know Before You Owe mortgage disclosure rule delaying the rule’s effective date until October 3, 2015. Comments on the proposed rule are due on or before July 7, 2015. CFPB Press Release.

OFR Updates Financial Stability Monitor

On June 24th, the U.S. Office of Financial Research (“OFR”) issued an update to its Financial Stability Monitor. The latest version of the monitor is online and includes an interactive feature which allows users to explore risk categories and subcategories, underlying risk indicators, and historical performance. The OFR used the updated monitor to issue an updated assessment of financial stability risk, which indicated that overall risks to financial stability remain moderate. OFR Press Release.

CFPB Supervision Report Uncovers Illegal Practices

On June 23rd, the CFPB released its supervision report detailing illegal practices discovered by the agency’s examiners between January 2015 and April 2015. The report revealed continued problems with illegal dual­ tracking of foreclosures, mortgage servicers failing to comply with procedures in handling loss mitigation applications by homeowners, debt collectors failing to process or investigate complaints, accuracy and quality control at credit reporting agencies, and fair lending violations. CFPB Press Release.

CFPB Report Highlights Problems with Student Loan Co­Signer Releases

On June 18th, the CFPB released the results of a study reviewing the practices of the private student loan industry. According to the CFPB’s report, ninety percent of consumers are being rejected for a co­signer release on their private student loans. The report noted problems created for both borrowers and co­signers when they are unable to obtain a co­signer release, including the risk of auto­default if the co­signer dies or files for bankruptcy. The report called for the private student loan industry to improve transparency surrounding co­signer release criteria and eligibility. CFPB Press Release.

Lew Champions FSOC before House Committee

On June 17th, Treasury Secretary Jacob Lew testified before the House Committee on Financial Services regarding the 2015 annual report of the Financial Stability Oversight Council (“FSOC”). In his testimony, Lew recounted the report’s findings on eleven themes that warrant continued attention and additional action as they relate to financial stability, including cybersecurity, changes to financial market structure, and risk­taking incentives of large, interconnected financial institutions. Lew emphasized the importance of the FSOC in identifying emerging threats to the financial system. Lew Testimony. According to a report in Market Watch, Committee Chair Jeb Hensarling questioned Lew regarding the impact of federal regulation, specifically the Volcker Rule, on financial stability, suggesting the regulations have reduced trading in the bond market, making it more susceptible to volatility.

Treasury Releases Proposed Kline­Miller Regulations

On June 17th, the Treasury Department released proposed and temporary regulations implementing the Kline­ Miller Multiemployer Pension Reform Act of 2014, which requires multiemployer pension plans to submit an application to the Treasury Department if they believe reductions in benefits are required to address financial problems. The Treasury Department also announced that Kenneth Feinberg was appointed as a Special Master to oversee implementation of the new regulations. Comments on the proposed regulations should be submitted on or before August 18, 2015. Treasury Department Press Release.

Treasury Department Releases Money Laundering and Terrorist Financing Risk Assessments

On June 12th, the Treasury Department released the National Money Laundering Risk Assessment (“NMLRA”) and the National Terrorist Financing Risk Assessment (“NFTRA”). The NMLRA found that the U.S. framework for anti­money laundering has been effective in preventing money launderers from outstripping the U.S. through innovation or exploiting vulnerabilities. The NFTRA found that the U.S. Government has made it more difficult for terrorist organizations to use the U.S. financial system to raise and move money, most notably through a decrease in terrorist­financing­related transactions passing through U.S. banks which forces terrorists to rely upon alternative methods to facilitate these transactions that are more expensive, less efficient, and riskier. Treasury Department Press Release.

Securities and Exchange Commission

Regulatory Orders

Political Contributions by Certain Investment Advisers

On June 25th, the SEC advised that the compliance date for the ban on third­party solicitation under Investment Advisers Act Rule 206(4)­5 is July 31, 2015. SEC Release No. IA­4129.

Relief for Certain Trading Activities of Financial Advisors

On June 16th, the Division of Corporation Finance granted Cambria ETF’s request for exemptive relief from Rule 14e­5 under the Securities Exchange Act. Rule 14e­5 generally prohibits the offeror, its advisors and any of its affiliates from purchasing or arranging to purchase any subject securities of the target or other related target securities outside the tender offer. In requesting relief, Cambria argued that without such relief the rule’s restrictions could impede the ability of the Funds to operate as intended and as disclosed in publicly filed documents, which could be detrimental to investors. No Action Letter.

Statements and Speeches

Chair White Discusses Proxy Issues

On June 25th, SEC Chair Mary Jo White discussed the delivery of preliminary proxy voting results by intermediaries, the concept of a universal proxy ballot, so­called “unelected” directors, and shareholder proposals at a speech before the Society of Corporate Secretaries and Governance Professionals. White Remarks.

Commissioner Aguilar Discusses Cybersecurity

On June 25th, Commissioner Luis A. Aguilar discussed cybersecurity risks and the SEC’s response. At the SINET Innovation Summit, Aguilar outlined SEC Regulation Systems Compliance and Integrity, noting its risk­ based approach and its requirement that a firm’s senior management and board be actively engaged in cybersecurity matters. Aguilar also summarized Commission cybersecurity inspections, examinations, and enforcement efforts, as well as the guidance SEC staff have provided. Aguilar Remarks.

Commissioner Gallagher Discusses Activism and Short­Termism and the SEC

On July 23rd, in an appearance at the 21st Annual Stanford Directors’ College, Commissioner Daniel M. Gallagher shared his ideas on shareholder activism and short­termism and the SEC. He talked about the SEC’s role regarding activism, how investors are conducting themselves regarding activists, and how all of the parties may co­exist peacefully. Gallagher Remarks.

Director of Broker­Dealer Exam Program Discusses AML

On June 18th, the SEC’s National Associate Director of its broker­dealer examination program, Kevin W. Goodman, spoke about the critical importance of anti­money laundering (“AML”) programs and outlined the challenges in designing and implementing effective AML programs. Goodman speech.

Commissioner Stein Discusses ETFs

On June 12th, SEC Commissioner Kara M. Stein reviewed the history of mutual funds and exchange traded funds (“ETFs”) and voiced her concerns that on the 75th anniversary of the Investment Company Act, the Act was no longer up to the task of effectively regulating the sector. Stein noted that as funds become ever more complex, the retail investor is being left unprotected on a number of important fronts. Stein asked, “Promising high liquidity, which all mutual funds must do, on illiquid assets that have not traditionally been a part of mutual funds, does not seem in keeping with the intent of the Investment Company Act.” In addition, Stein warned that the increasingly over leverage of funds obtained through derivatives bore a striking resemblance to the funds that imploded in the 1920s. She noted, “the Commission’s approach must reflect the Investment Company Act’s foundational principle that leverage be limited in registered funds.” In conclusion, as more of Main Street invests in ETFs to fund retirement, “regulators and the industry have a responsibility to make certain that the legal framework is stable and remains focused on protecting the retail investor.” Stein Speech.

Other Developments

Open Meeting

The SEC will hold an Open Meeting on July 1, 2015 to consider whether to propose amendments under Section 10D of the Securities Exchange Act to require the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements for the recovery of incentive­based compensation. SEC Meeting Notice.

Advisory Committee on Small and Emerging Companies Meeting

The SEC’s Advisory Committee on Small and Emerging Companies will hold an open, public telephone meeting on July 15, 2015. The agenda for the meeting includes a continuation of discussions started at the Committee’s meeting on June 3, 2015, regarding public company disclosure effectiveness and the treatment of “finders.” SEC Release No. 33­9854.

Dodd­Frank Investor Advisory Committee Meeting

The SEC’s Investor Advisory Committee will meet on July 16, 2015. The Committee is expected to discuss background checks as a means to address elder financial abuse; the Department of Labor’s fiduciary rule proposal; shareholder rights; and the disclosure of fees and risks in mutual fund products. SEC Release No. 33­ 9851.

Staff Announcements

On June 25th, the SEC named John C. Roeser as Associate Director and deputy head of the Office of Market Supervision in the Division of Trading and Markets. SEC Press Release.

C&DI Updates

On June 23rd, the SEC’s Division of Corporation Finance added new Questions 182.01 through 182.11to its Compliance and Disclosure Interpretations (“C&DI”). The new C&DIs address Rules 251 through 263 of Regulation A. The Division also withdrew Questions 128.01 and 128.03 concerning Form 1­A. C&DIs.

Risk Alert

On June 22nd, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced the launch of a multi­year industry targeted review of certain registered investment advisers and broker­dealers. Under the Retirement­Targeted Industry Reviews and Examinations (“ReTIRE”) Initiative, OCIE, through the National Examination Program, will focus on certain higher­risk areas of registrants’ sales, investment, and oversight processes, with particular emphasis on select areas where retail investors saving for retirement may be harmed. Risk Alert.

Investor Alert

On June 17th, the SEC’s Office of Investor Education and Advocacy issued an Investor Alert warning about fantasy stock trading and other similar websites that may violate federal securities laws designed to protect investors from abuses in the swaps market. Security­based swaps are any agreement whose value is based upon ­ or “derivative” of ­ the value of some other instrument or event. Websites offering “fantasy” trading games or competitions may be offering security­based swaps and may be violating federal securities laws. The SEC urged investors to not only understand the nature of the product itself, but also whether they qualify as an Eligible Contract Participant (“ECP”). The Dodd­Frank Act regulates the sale of security­based swaps to persons who are not “ECPs.”

Updated EDGAR Filer Manual

On June 12th, the SEC published the latest EDGAR Filer Manual (Volume II) EDGAR Filing (Version 32). The revised manual supports EDGAR Release 15.2; Support for Regulation A changes. Updated manual.

Commodity Futures Trading Commission

Division of Market Oversight Public Roundtable

The Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight will hold a public roundtable on July 15, 2015 to discuss the Commodity Exchange Act’s trade execution requirement as well as the procedures involved in making Made Available to Trade determinations. CFTC Press Release.

Part 20 Report Updates

On June 22nd, the CFTC’s Division of Market Oversight issued a revised Guidebook and Appendices for Part 20 Reports. The revised Guidebook provides guidance and full instructions for submitting large swaps trader reports to the CFTC under Part 20 of its regulations. The revisions include technical corrections as well as improved FpML and FIXML reporting formats. CFTC staff will implement the improved validation rules in a “test environment” on July 6, 2015 and the rules will go live on August 31, 2015. CFTC Press Release.

CFTC Extends Relief Period from Valuation Data Reporting Obligations for Cleared Swaps

On June 15th, the CFTC’s Division of Market Oversight issued a no­action letter extending until June 30, 2016, relief from the obligation to report valuation data for cleared swaps to swap dealers and major swap participants. The Division cited ongoing concerns regarding the burden and costs of obtaining connectivity to all swap data repositories for swap dealers and participants in extending the time­limited relief. CFTC Press Release.

Federal Rules Effective Dates

June 2015 ­ August 2015

Commodity Futures Trading Commission

July 10, 2015             Proceedings Before the Commodity Futures Trading Commission; Rules Relating to Suspension or Disbarment From Appearance and Practice. 80 FR 32855.

Consumer Financial Protection Bureau

August 10, 2015         Minimum Requirements for Appraisal Management Companies. 80 FR 32657.

August 1, 2015           Amendments to the 2013 Integrated Mortgage Disclosures Rule Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) and the 2013 Loan Originator Rule Under the Truth in

                                      Lending Act (Regulation Z). 80 FR 8767.

Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z). 78 FR 79730.

Federal Deposit Insurance Corporation

August 10, 2015         Minimum Requirements for Appraisal Management Companies. 80 FR 32657.

July 1, 2015               Restrictions on Sale of Assets of a Failed Institution by the Federal Deposit Insurance Corporation. 80 FR 22886.

Federal Housing Finance Agency

August 10, 2015         Minimum Requirements for Appraisal Management Companies. 80 FR 32657.

July 6, 2015                 Minority and Women Inclusion Amendments. 80 FR 25209.

June 29, 2015            Federal Home Loan Bank Community Support Program ­ Administrative Amendments. 80 FR 30336.

Federal Reserve System

August 10, 2015         Minimum Requirements for Appraisal Management Companies. 80 FR 32657.

July 23, 2015             Regulation D: Reserve Requirements for Depository Institutions. 80 FR 35565.

Foreign Assets Control Office

June 15, 2015            Cuban Assets Control Regulations; Terrorism List Governments Sanctions Regulations. 80 FR 34053.

National Credit Union Administration

July 6, 2015               Chartering and Field of Membership Manual. 80 FR 25924.

June 5, 2015              Corporate Credit Unions. 80 FR 25932.

Office of the Comptroller of the Currency

August 10, 2015         Minimum Requirements for Appraisal Management Companies. 80 FR 32657.

July 1, 2015               Integration of National Bank and Federal Savings Association Regulations: Licensing Rules. 80 FR 28345.

Securities and Exchange Commission

June 19, 2015            Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A). Correction 80 FR 35207.

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

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

Exchanges and Self­Regulatory Organizations

Chicago Board Options Exchange

Disapproval Proceedings Instituted for Market Maker Proposal

On June 18th, the SEC instituted proceedings to determine whether to approve or disapprove the Chicago Board Options Exchange’s (“CBOE”) proposed amendments to Exchange Rules 6.74A and 6.74B. The proposal would amend the Exchange’s rules 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. Comments should be submitted on or before July 15, 2015. Rebuttal comments should be submitted on or before July 29, 2015. SEC Release No. 34­75245.

Financial Industry Regulatory Agency

FINRA Requests Comment on Delay Period for TRACE Data

On June 23rd, the Financial Industry Regulatory Authority (“FINRA”) requested comment on a proposal that would shorten the delay period for the publication of historic Trade Reporting and Compliance Engine (“TRACE”) data. The proposed amendment would shorten the delay period to six months from 18 months. Comments should be submitted on or before August 24, 2015. FINRA Regulatory Notice 15­24.

FINRA Requests Comment on Discretionary Accounts and Transactions Rule

On June 17th, FINRA requested comment on a revised proposal to adopt the NASD and Incorporated NYSE rules regarding discretionary accounts and transactions as FINRA Rule 3260. The revised proposal addresses the treatment of customers’ free credit balances, sweep programs, bulk transfers of customers’ accounts, and change of broker­dealer of record. Comments should be submitted on or before August 17, 2015. FINRA Regulatory Notice 15­22.

International Swaps and Derivatives Association

ISDA Launches EBRRD Implementation Monitor

On June 17th, the International Swaps and Derivatives Association ("ISDA") launched the European Bank Recovery and Resolution Directive (“EBRRD”) Implementation Monitor. The implementation monitor focuses on the status of the implementation of the EBRRD’s derivatives­specific provisions and will be updated on a regular basis. ISDA Press Release.

ICE Clear

ICC Proposes Risk Management Subcommittee Correction

On June 16th, the SEC provided notice of ICE Clear Credit’s (“ICC”) proposed rule change that would correct inconsistent provisions regarding the Risk Management Subcommittee. ICC wishes to remove a reference to a CFTC regulation which has not yet been adopted. Comments should be submitted on or before July 13, 2015. SEC Release No. 34­75179.

Miami International Securities Exchange

Proposed Amendment to Exchange Rule 515 Approved

On June 11th, the SEC approved the Miami International Securities Exchange’s proposed amendment of Exchange Rule 515 regarding the functionality of customer cross order and qualified contingent cross order types. The proposal amends Rule 515(h) to provide that trading interest that is subject to an ongoing timer or auction will maintain priority over a new incoming Customer Cross Order or Qualified Contingent Cross Order. SEC Release No. 34­75152.

Municipal Securities Rulemaking Board

New Feature to EMMA

On June 16th, the Municipal Securities Rulemaking Board (“MSRB”) announced the addition of a new feature to its Electronic Municipal Market Access website that links a municipal bond to any new CUSIPs assigned to portions of that bond. MSRB Press Release.


Amendments to Complex Order Trading Rules Proposed

On June 17th, the SEC provided notice of NASDAQ OMX PHLX’s proposed amendment of Exchange Rule 1080.07 which governs the Exchange’s Complex Order System. Rule 1080.07 includes an opening process, the Complex Order Live Auction, an automated auction for seeking additional liquidity and price improvement for Complex Orders, and a Complex Limit Order book. Except for the time period referred to in Rule 1080.07(f)(i)(F) and the acceptance and treatment of all­or­none orders, the Exchange proposes to correct several inconsistencies between the existing Complex Orders rule, Rule 1080.07, and the operation of the Complex Orders System today. Comments should be submitted on or before July 14, 2015. SEC Release No. 34­75189.


Longer Period Designated for Proposed New Equity Trading Rules

On June 23rd, the SEC designated August 17, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings for NYSE Arca’s proposed adoption of new equity trading rules relating to Trading Sessions, Order Ranking and Display, and Order Execution to reflect the implementation of Pillar, the Exchange’s new trading technology platform. SEC Release No. 34­75273.

Longer Period Designated for Proposed Rule Amending NYSE Manual

On June 18th, the SEC designated August 4, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding the New York Stock Exchange’s proposed amendment of Sections 312.03(b) and 312.04 of the NYSE Listed Company Manual to exempt early stage companies from having to obtain shareholder approval before issuing shares for cash to related parties, affiliates of related parties, or entities in which a related party has a substantial interest. SEC Release No. 34­75248

Quote Mitigation Plan Disapproved

On June 17th, the SEC disapproved NYSE Arca’s and NYSE MKT’s individually submitted proposals to remove their respective quote mitigation plans.

Options Clearing Corporation

OCC Files Proposed Rule on Clearing Fund.

On June 22nd, the SEC provided notice of the Options Clearing Corporation’s filing of a proposed rule change that would codify the procedures for resizing the Options Clearing Corporation’s clearing fund on a monthly basis and increasing such clearing fund size on an intra­month basis. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of June 29. SEC Release No. 34­ 75260.

Judicial Developments

Misleading Language Breached Safe Harbor Protection for Forward­Looking Statements

On June 23rd, the D.C. Circuit reinstated a shareholder suit that alleged that Harman International Industries Inc. and three of its officers knowingly and recklessly propped up the company’s stock price. Reversing dismissal, the Court found plaintiffs plausibly alleged that two statements focusing on the company’s products were not entitled to the safe harbor protection for forward looking statements because the accompanying cautionary language was misleading. The Court additionally found that a third statement about the company’s financial performance was specific and not immaterial or “puffery.” In re Harman International Industries Inc. Securities Litigation.

Former Guaranty Stockholders Fail to Adequately Allege Former Executives’ Knowledge of False and Misleading Statements

On June 12th, the Fifth Circuit affirmed the dismissal of securities fraud claims filed against the executives of a failed bank. After Guaranty Bank’s parent company filed for bankruptcy, former Guaranty stockholders whose equity interests were wiped out when the bank failed alleged that the former executives made materially false and misleading statements regarding Guaranty’s assets. The district court dismissed the claims and the appellate court affirmed, finding that allegations of defendants’ knowledge of Guaranty’s undercapitalization, a large misstatement, red flags, and ignorance of internal warnings, did not raise a strong inference of severe recklessness. Bruce Owens v. Kenneth M. Jastrow II, et al.

Industry News

Updating BDC Rules

On June 26th, Forbes highlighted the efforts of Representative Mick Mulvaney, who sits on the House Financial Services Committee, to update the laws and regulations governing business development companies. BDC Developments.

Canadian Central Bank Deputy Governor Suggests Bilateral Agreement

On June 25th, Reuters summarized the remarks of Lawrence Schembri, Deputy Governor of the Bank of Canada. Schembri called for a Canadian­U.S. treaty addressing the resolution of banks with cross­border operations. Entreaty.

Delaware Bans “Loser Pays” Bylaws

On June 25th, Reuters discussed Delaware’s adoption of a statute prohibiting companies from adopting “fee­ shifting” bylaws which require the loser in a shareholder derivative lawsuit to pay the attorney fees of the winner. The new law does permit firms to adopt forum selection bylaws that require derivative suits to be filed in Delaware. Bylaws.

Inter­Agency Squabble Over Inter­Affiliate Collateral

On June 25th, Bloomberg described the disagreement between the OCC and the FDIC over the amount of posted collateral which should be required when a firm engages in a swap transaction with an affiliate. Squabble.

Disqualifying Lenders

On June 25th, Reuters noted the growing use of disqualified­lender lists. The lists are added to credit agreements by borrowers in an effort to keep rivals, and sometimes private equity firms, from participating in the borrower’s leveraged loan. The borrowers fear that the rival’s or private equity firm’s participation in a leveraged loan might give them access to the borrower’s material, non­public information. Disqualified Lenders.

Stress Test Models to Remain Under Wraps

On June 24th, the Wall Street Journal quoted New York Federal Reserve Bank official James McAndrews as saying that the FRB will not make public the models it uses to conduct its annual stress tests of banks. Under Wraps.

2015 SNC Review Puts Pressure on Large Investment Banks

On June 23rd, Reuters reported regulators have warned large investment banks that the quality of U.S. leveraged loans are not as good as the banks claimed, though this did not prompt regulatory action other than requests to improve. The 2015 Shared National Credit (“SNC”) review, conducted by the FRB, OCC, and FDIC, which is currently underway could change that. One consequence of the increased regulatory pressure is that more debt is being arranged by lenders that are not overseen by the FRB, OCC or FDIC. SNC Review.

Dodd­Frank at Five

On June 23rd, issued a special report on the Dodd­Frank Act five years after its adoption. The report examines the SEC’s anticipated rules concerning executive compensation disclosure; opposing viewpoints on the Act’s effectiveness; and the Act’s impact on smaller banks. Dodd­Frank at Five.

ALJ Constitutionality Question

On June 17th, Reuters examined the constitutionality of administrative law judges (“ALJ”) with particular emphasis on the recent ruling by U.S. District Court Judge Leigh May which found that the SEC’s ALJ appointments violate the U.S. Constitution’s Appointments Clause. The SEC says that Judge May wrongly defined SEC ALJs as executive branch officers. If the SEC changes how it appoints ALJs, it could affect past and present SEC enforcement actions as well as cases at other regulatory agencies. ALJ Appointments. See the Wall Street Journal for the SEC response.

Possible New Rules for Insurers

On June 16th, Reuters reported that the FRB is considering new insurance capital standards that would be based on current accounting methods and still be state­regulated. However, the new plan would provide a single benchmark to measure risk in larger insurance firms enabling the FRB to compare them with other U.S. or foreign financial firms. According to Reuters, FRB staff also said they are concerned that “many insurers engage in risky financial market activities, such as securities lending and investing in derivatives.” Insurer Risk.