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Volume 10, no. 28 |
August 17, 2015 |
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On August 10th SEC Commissioner Luis Aguilar issued a statement reiterating the need for published SEC enforcement orders to include sufficiently detailed descriptions of relevant facts, misconduct, and sanctions and remedies so that the orders consistently provide “clear and transparent” direction to the securities industry regarding what is, and what is not, acceptable behavior.
Commissioner Aguilar’s statement emphasizes the need for clarity in all enforcement-related orders, generally, but also stresses the special importance of clarity in enforcement orders involving federal securities law violations by Chief Compliance Officers (CCOs).
Noting that the very purpose of a CCO is to implement policies and procedures within its organization to prevent federal securities law violations, Commissioner Aguilar – himself a former general counsel and head of compliance at a global asset management firm – stresses that the content of enforcement orders involving CCO violations receives particularly close scrutiny from, and provides particularly pertinent guidance to, the compliance community. Commissioner Aguilar, who has previously written on compliance-related enforcement matters, also notes public attention given to certain recent CCO-related enforcement actions, citing (among other references) this recent briefing published by Winston & Strawn LLP.
To be sure, Commissioner Aguilar’s statement acknowledges that certain factors can limit the facts and detail that is included in an enforcement order. First, an enforcement order need only include the facts necessary to support any charges alleged in the order. Second, in the case of enforcement orders describing a settlement between the SEC and a respondent, the facts included in such an order are often negotiated between the SEC and settling respondent. In these situations, the SEC must weigh the public’s interest in a just and speedy resolution versus continuing to negotiate the inclusion of further details in the enforcement order.
Nevertheless, Commissioner Aguilar’s statement notes that enforcement orders are often the primary or only public record with respect to certain proceedings. Considering this, in order to ensure that the SEC’s enforcement orders achieve their purpose of informing securities industry participants and the public about misconduct and deterring such misconduct in the future, Commissioner Aguilar asserts that the SEC must remain vigilant in publishing enforcement orders that are as “clear, transparent, and precise” as possible.
Please contact your Winston and Strawn LLP attorney to discuss SEC enforcement and compliance-related matters. |
| John Albers |
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Given the attention it received, it would be easy to assume that the Securities and Exchange Commission (“SEC”) only adopted one new final rule this month, the pay ratio disclosure rule, which requires public companies to disclose the ratio of the compensation of their chief executive officers to the median compensation of their employees. But, in fact, the SEC adopted two. The second rule describes the process by which security-based swap dealers and major security-based swap participants, collectively referred to as “SBS Entities,” will register with the SEC. In connection with that new final rule, the SEC also voted to propose Rule of Practice 194, which would provide a process for a registered SBS Entity to apply to the Commission for an order permitting the SBS Entity to continue to engage in security-based swaps activities through associated persons subject to certain adverse legal actions if doing so would be consistent with the public interest.
The new final rule addresses all aspects of the registration regime for SBS Entities, setting forth the information required to be provided and kept up to date by a registrant. The rule also requires senior officers to make certifications about the registrant’s policies and procedures for compliance with the federal securities laws at the time of registration.
The first certification requires a senior officer of the applicant to certify that, after due inquiry, he or she has reasonably determined that the applicant has developed and implemented written policies and procedures reasonably designed to prevent violations of the federal securities laws and that he or she has documented the process by which that determination was reached. The second certification requires the SBS Entity’s Chief Compliance Officer (“CCO”) to certify that the CCO neither knows, nor should have known, that any person who is involved in effecting security-based swaps for the SBS Entity is subject to a statutory disqualification. To support that second certification the CCO must review and sign the employment questionnaire or application of those natural persons involved in transacting securities-based swaps for the SBS Entity.
Although the new final rule is effective October 13, 2015, the compliance date for the rule will be based on the implementation of the business conduct, financial responsibility, and recordkeeping rule for registered SBS Entities, as well as the finalization of proposed Rule of Practice 194.
Proposed Rule of Practice 194 would establish a comprehensive process for SBS Entities to apply to the Commission for permission to continue effecting security-based swaps activities through associated persons that have been subject to a statutory disqualification, so-called “bad actors.” Under the proposal, statutorily disqualified associated persons that are entities would be able to effect security-based swaps activities on behalf of the SBS Entity for a limited period of time while the Commission evaluates the SBS Entity’s application. However, a statutorily disqualified associated person that is a natural person would not be so permitted.
Comments on proposed Rule of Practice 194 should be submitted within 60 days after publication in the Federal Register, which is expected shortly. |
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| On August 12th, the Consumer Financial Protection Bureau (“CFPB”) announced that it, along with the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”), took action against a bank for failing to credit consumers the full amounts of their deposited funds. The bank kept money from deposit discrepancies when receipts did not match actual money transferred. The CFPB consent order requires the bank to provide approximately $11 million in refunds to consumers and pay a $7.5 million penalty for the violations. Bank Action. See also CFPB Director Remarks; OCC Press Release; FDIC Press Release; and FDIC Order. |
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| On August 12th, the Federal Reserve Board (“FRB”) announced that it will conduct a floating-rate offering of term deposits with an early withdrawal feature through its Term Deposit Facility (“TDF”). The FRB will offer seven-day term deposits with a rate set equal to the sum of the interest rate paid on excess reserves (currently 25 basis points) plus a fixed spread of one basis point. The maximum tender amount per institution will be $5,000,000,000. |
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| On August 10th, the FRB clarified Regulation II (Debit Card Interchange Fees and Routing) concerning the inclusion of transaction-monitoring costs in the interchange fee standard. Among other things, Regulation II implements standards for assessing whether interchange transaction fees for electronic debit transactions are reasonable and comparative to the cost incurred by the issuer, as required by section 920 of the Electronic Fund Transfer Act. The clarification is effective immediately. |
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| On August 13th, the Office of Financial Research (“OFR”) published a working paper regarding how the degree of correlation among stock returns affects the possibility to diversify the risk of investment, and how it plays a major role in financial spillover. |
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| On August 13th, SEC Commissioners Aguilar, Gallagher, Piwowar, and Stein released a joint statement in response to an enforcement action against Edward D. Jones & Co. Inc, in which the brokerage firm and the head of its municipal underwriting desk settled allegations that they improperly offered clients new bonds at prices higher than the initial offering price. The Commissioners urged the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (“MSRB”) to complete rulemaking mandating the disclosure of mark-ups and mark-downs. The Commissioners suggested that, in the absence of action by FINRA and the MSRB, the SEC should propose rules requiring transparency of mark-ups and mark-downs. Joint Statement. |
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| On August 7th, Commissioner Michael Piwowar elaborated upon his dissent from the pay ratio disclosure rule adopted by the SEC at its August 5th open meeting. Commissioner Piwowar raised several objections to the content of the rule and the manner in which it was adopted, arguing that the adopting release failed to provide sufficient explanation of the purpose of the rule in violation of the Administrative Procedure Act; the Commission acted arbitrarily and capriciously when it limited the de minimis exclusion of non-U.S. employees to five percent and included contract workers employed by unaffiliated third parties in the definition of employee under the rule; the Commission failed to consider the impact of the rule upon CEO compensation in its economic analysis; and the use of pay ratio by investment advisers for comparative purposes may violate their fiduciary duties. Piwowar Remarks. |
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| On August 13th, Chief Investment Officer reported that insurance companies are responding to the SEC’s heightened focus on the fund management industry by offering increased coverage for asset managers. The report noted that an increase in enforcement actions, whistleblower activity, and investment adviser examinations by the SEC has increased asset managers’ exposure to liability and risk. Asset Manager Insurance. |
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| On August 13th, Robin Ferracone, writing in Forbes, advised companies on strategies and steps to consider as they prepare to comply with the SEC’s recently adopted pay ratio disclosure rule. While Ferracone expressed doubts regarding the rule’s effectiveness in assisting investors, she set out the three steps companies will need to take in preparing the CEO to median employee pay ratio. Ferracone advised companies to minimize the narrative they provide to explain their pay ratio disclosure unless elaboration would be to their benefit. Compliance Steps. |
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| On August 11th, InvestmentNews reported that Precidian Investments has submitted a new proposal to the SEC for an exchange-traded fund (“ETF”) that would not disclose the stocks and bonds held by its managers. The SEC has raised concerns regarding the viability of a non-transparent ETF in response to proposals previously submitted by Precidian. ETF Proposal. |
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| On August 7th, the SEC’s Office of the Inspector General released an Interim Report of Investigation detailing the status of its investigation of alleged bias on the part of ALJs in Commission administrative proceedings. According to the report, the investigation to date has not discovered any evidence corroborating the allegations of bias by ALJs in their decisions issued in administrative proceedings. OIG Interim Report. |
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| On August 14th, U.S. Commodity Futures Trading Commission (“CFTC”) Commissioner Mark P. Wetjen announced his resignation from the CFTC, effective August 28th, 2015. As Commissioner, Wetjen, among other things, helped implement the Dodd-Frank Act. Wetjen Resignation. |
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| On August 10th, Bloomberg Business wrote that Wall Street banks might soon win a further delay of a U.S. policy that clamps down on their overseas derivatives trades. According to two unnamed sources, the CFTC will probably postpone plans to subject transactions that are set up in the U.S., but are held in overseas divisions, to Dodd-Frank Act trading regulations. The sources noted that the regulator is weighing how long the delay should be. The policy, set to take effect on September 30th, has already been delayed four times. Overseas Swaps. See also No-Action Relief Letter and Press Release. |
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| October 3, 2015 |
2013 Integrated Mortgage Disclosures Rule Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) and Amendments; Delay of Effective Date. 80 FR 43911. |
| August 31, 2015 |
Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service. 80 FR 37495. |
| August 10, 2015 |
Minimum Requirements for Appraisal Management Companies. 80 FR 32657. |
| August 1, 2015 |
Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z). 78 FR 79730. |
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| October 1, 2015 |
Loans in Areas Having Special Flood Hazards. 80 FR 43215. |
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Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409. |
| August 10, 2015 |
Minimum Requirements for Appraisal Management Companies. 80 FR 32657. |
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| August 10, 2015 |
Minimum Requirements for Appraisal Management Companies. 80 FR 32657. |
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| October 1, 2015 |
Loans in Areas Having Special Flood Hazards. 80 FR 43215. |
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Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409. |
| August 10, 2015 |
Minimum Requirements for Appraisal Management Companies. 80 FR 32657. |
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| August 28, 2015 |
Imposition of Special Measure Against FBME Bank Ltd., Formerly Known as the Federal Bank of the Middle East Ltd., as a Financial Institution of Primary Money Laundering Concern. 80 FR 45057. |
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| October 2, 2015 |
Federal Credit Union Ownership of Fixed Assets. 80 FR 45844. |
| October 1, 2015 |
Loans in Areas Having Special Flood Hazards. 80 FR 43215. |
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| October 1, 2015 |
Loans in Areas Having Special Flood Hazards. 80 FR 43215. |
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Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409. |
| August 10, 2015 |
Minimum Requirements for Appraisal Management Companies. 80 FR 32657. |
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| August 14, 2015 |
Freedom of Information Act Regulations: Fee Schedule, Addition of Appeals Time Frame, and Miscellaneous Administrative Changes. 80 FR 41432. |
| August 13, 2015 |
Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants. 80 FR 48963. |
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| On August 13th, the SEC announced that BATS Exchange, Inc. (“BATS”) has proposed a new rule that would define layering and spoofing more specifically and prohibit these activities on the exchange, along with rule amendments that would establish an expedited process for BATS to suspend Members that violate the proposed rule prohibiting layering and spoofing. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 17, 2015. SEC Release No. 34-75693. |
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| On August 13th, the SEC designated October 7, 2015, as the date by which it will either approve or deny FINRA’s proposal to publish, as part of the expansion of its alternative trading system (“ATS”) transparency initiative, the remaining equity volume executed over-the-counter by FINRA members, including non-ATS electronic trading systems and internalized trades. SEC Release No. 3475697. |
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| On August 10th, FINRA announced that it will implement revisions to the Series 4 examination program, which serves as the qualifying exam for Registered Options Principals. The revisions include changes to the content outline to highlight the six major job functions performed by Registered Options Principals, adjustments to the number and weighting of questions assigned to each job function, and a greater emphasis on key tasks. The changes will be implemented in examinations administered on or after September 28, 2015. FINRA Regulatory Notice 15-29. |
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| On August 10th, the SEC announced that FINRA has proposed to adopt FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial Institutions) as part of the development of its new consolidated rulebook. The new rule would, among other things, enable member firms to monitor the personal accounts opened or established outside of the firm by its associated persons and require associated persons to obtain consent before opening an account at another financial institution. Comments should be submitted on or before September 4, 2015. SEC Release No. 34-75655. |
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| On August 13th, the SEC approved ICE Clear Europe Limited’s (“ICE Clear Europe”) proposal to amend its Finance Procedures in order to allow Clearstream Banking to act as a triparty collateral service provider for initial or original margin in respect of any product category, including the CDS product category. SEC Release No. 34-75692. |
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| On August 7th, the SEC requested comment on the MSRB’s proposed rule change that would revise the content outlines for the Municipal Fund Securities Limited Principal (Series 51), Municipal Securities Representative (Series 52), and Municipal Securities Principal (Series 53) Qualification Examinations. Comments should be submitted on or before September 3, 2015. SEC Release No. 34-75646. |
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| On August 11th, the SEC designated September 28, 2015, as the date by which it will either approve or disapprove the New York Stock Exchange LLC’s proposed amendment to its Eighth Amended and Restated Operating Agreement, which would establish a Regulatory Oversight Committee as a Committee of the Board of Directors of the Exchange as well as make other conforming amendments to Exchange Rules. SEC Release No. 34-75659. |
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| On August 10th, The Options Clearing Corporation (“OCC”) withdrew its proposed change to Rule 1001(a), which would have allowed it to adjust the size of its clearing fund on an intra-month basis. SEC Release No. 34-75658. |
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| On August 11th, the D.C. Circuit affirmed a SEC order denying a request for an exemption. The SEC denied the request of open-end mutual fund Copley Fund Inc. for an exemption from the SEC rule that Copley must calculate and report its deferred tax liability based on the amount of tax it would owe if its entire stock portfolio were liquidated. The D.C. Circuit denied Copley’s petition for review, agreeing with the SEC that granting the exemption would run counter to the Investment Company Act of 1940, which requires that a redemption price based on “net asset value” be calculated to eliminate or reduce any unfair “dilution of the value” of shares held by non-redeeming shareholders. |
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| On August 12th, CFO.com reported that U.S. Senator Elizabeth Warren of Massachusetts expressed her concern as to whether financial firms could use a new instant-messaging system to protect themselves from regulatory scrutiny. In a letter to the SEC and five other agencies, Sen. Warren wrote that the developer of the system, Symphony Communications LLC, has described it as a way to “prevent government spying” with “no backdoors.” Symphony denied that its service, which is meant to allow employees to trade messages instantly and securely, could be used to evade compliance. Messaging Service. |
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| On August 10th, The Boston Globe reported that the paper industry is trying to convince the SEC that it should not switch to the Internet for mutual fund deliveries. The paper industry commented that the SEC’s Proposed Rule 30e-3 “would impede access for many investors, especially the elderly, those with disabilities, and minority Americans – all demographics that are less likely to have regular Internet access.” |
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| On August 10th, Reuters reported that Kansas City-based exchange operator BATS Global Markets has received regulatory approval to open EDGX Options, its second U.S. options exchange, set to be launched on November 2nd. Incoming options orders will be sorted by price, and if there are two or more orders at the best price, trades will be allocated proportionally according to size. |
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| On August 10th, Reuters reported on the risks involved with social media in the financial services sector. A survey, conducted by the U.S. Investment Adviser Association, ACA Compliance Group, and OMAM, found that there are risks involved in social media-hosted email accounts used by financial advisers. Advisers, who have no official guidance from the SEC on social media rules, currently rely only on guidance obtained from conferences and regulatory notices from FINRA. Social Media. |
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| On August 10th, Reuters summarized a U.S. federal judge’s ruling that New York City’s “responsible banking” law, which called for banks holding the city’s over $6 billion in deposits to document how well they meet the needs of low-income neighborhoods, is unconstitutional. The judge found that the 2012 law illegally conflicts with both federal and state statutes that regulate banks. |
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| On August 7th, The New York Times reported that the SEC has been increasing enforcement by quietly pursuing several high-profile insider trading cases that could enable it to redefine its regulatory role and regain momentum. This comes as the SEC had recently been called out for focusing only on minor cases, not being aggressive enough in pursing Wall Street banks, and being too aggressive in seeking an unfair advantage for trying cases by using administrative courts where SEC-appointed judges hear cases. |
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| On August 7th, InvestmentNews reported that Senator Jack Reed of Rhode Island introduced a bill that would extend the statute of limitations for the SEC to seek civil monetary penalties from five to 10 years. This proposed legislation was brought in response to a unanimous 2013 U.S. Supreme Court decision, Gabelli v. SEC, which held that the current five-year time limit for the SEC to bring charges begins when the violation occurs, not when it is discovered by the agency. Senator Reed asserted that Gabelli could leave investors vulnerable to financial fraud involving increasingly complex investment products and elaborate transactions that can be hidden from regulators for years. |
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| The Investment Management Legal Resource provides financial services professionals with up-to-date news, analysis, and commentary on regulatory and legal developments affecting the investment management industry. It covers a broad range of topics that may be of interest to traditional investment advisers, hedge fund managers, private equity fund managers, real estate fund managers, venture capital fund managers, commodity pool operators, and broker dealers. IMLR Blog. |
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| The EU Weekly Briefing is designed to provide timely updates on recent European Union competition law by including a short description of, and links to, recent developments. Newsletter. |
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| For more information regarding the Financial Services Update and the Financial Services Practice please contact: Basil V. Godellas (+1 (312) 558-7237 or bgodellas@winston.com) or Jay Gould (+1 (415) 591-1575 or jgould@winston.com), Co-Chairs of Winston’s Financial Services Corporate Practice Group. Please click here to see a list of Winston & Strawn professionals with practices in the financial services industry. |
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