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| | ______February 27, 2012 | | Volume 7, No. 9 |
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| Insights from Winston & Strawn |
[Top] |
Last week, Chairman Mary Schapiro of the U.S. Securities and Exchange Commission (the "SEC") gave a speech at Practicing Law Institute's "SEC Speaks in 2012" program. Chairman Schapiro addressed a number of organizational changes that have been implemented at the SEC in the wake of the financial crisis and as a result of efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. In particular, she highlighted the new National Examination Program developed by the SEC's Office of Compliance Inspections and Examinations ("OCIE"). The National Examination Program has as its goals (i) detecting possible violations of securities laws and regulations; (ii) fostering strong compliance and risk management practices; (iii) monitoring risk; and (iv) providing the SEC and its policy divisions with information about the industry's compliance and the implementation of rules and laws. Chairman Shapiro highlighted how the National Examination Program has changed the process for assembling examination teams, which now seeks to match the examiner's skills with the nature and complexity of the business operated by the examinee. She also noted that OCIE and the Division of Risk, Strategy, and Financial Innovation have worked together to establish a risk-based approach to target examinations. According to Chairman Schapiro, since 2009, better targeting and more effective examinations have led to a one-third increase in the identification of significant findings during exams, with a fifty percent increase of referrals to the SEC's Division of Enforcement (the "Division").
Chairman Schapiro also spoke about various changes within the Division. In particular, she highlighted the creation of the Asset Management Unit. The Asset Management Unit launched the Aberrational Performance Inquiry initiative, whereby the Division now uses proprietary risk analytics to evaluate hedge fund returns for performance that appears inconsistent with a fund's investment strategy or other benchmarks. Inconsistencies found lead to further scrutiny from the Staff. In particular, Chairman Schapiro noted that the Aberrational Performance Inquiry initiative led to four managers being charged last December with inflating returns and overvaluing assets. She also highlighted the Asset Management Unit's efforts to survey social media, which led to an investigation that uncovered an attempt by an adviser to offer fictitious securities through various websites. Chairman Schapiro reported that the SEC brought 735 enforcement actions last year, obtained orders for $2.8 billion in penalties and disgorgements, and returned more than $2 billion to investors.
A transcript of the Chairman's speech can be found here. We will continue to keep you apprised of any developments in this important area.
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| In the News |
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- U.S. Attorney General Describes Actions Precipitating Financial Crisis as Not Necessarily Criminal.
On February 24th, Bloomberg summarized the remarks made by U.S. Attorney General Eric Holder. Holder stated that while the financial crisis may have been precipitated by "morally reprehensible" actions, those actions were not necessarily criminal. Holder Remarks. - The FDIC's Attempts to Hold Bank Executives Accountable.
On February 23rd, Reuters discussed the Federal Deposit Insurance Corporation's (the "FDIC") efforts to hold accountable bank executives deemed responsible for their banks' failure. The regulator's actions have won it little praise and even less money. Futile Efforts. - Business Groups Seek FCPA Guidance.
On February 23rd, Law.com reported that the U.S. Chamber of Commerce Institute for Legal Reform, along with numerous other business associations, has asked the Justice Department and the Securities and Exchange Commission (the "SEC") to clarify their policies concerning the Foreign Corrupt Practices Act. Clarification. - MF Global Investigation Focuses on Two Transfers.
On February 23rd, Crain's Chicago Business, citing the Wall Street Journal, reported that the Commodity Futures Trading Commission (the "CFTC") and the bankruptcy trustee for MF Global's brokerage unit are examining two transfers made from customer accounts shortly before the firm's collapse. Transfers. - Possible Anti-Volcker Strategy: Incite Foreign Governments to Act.
On February 22nd, Bloomberg reported that large financial institutions encouraged U.S. regulators to expand the scope of the Volcker rule, the Dodd-Frank Wall Street Reform and Consumer Protection Act's (the "Dodd-Frank Act') prohibition against proprietary trading, and then told the embassies of foreign governments that the provision jeopardized the trading of sovereign debt in the U.S. Those foreign governments, in turn, submitted highly critical comments to U.S. regulators. At least one professor, however, believes the banks may have overplayed their hand. Volcker Strategy.
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| Treasury Department Developments |
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- CFPB Seeks Nominations for Consumer Advisory Board.
On February 23rd, the Consumer Financial Protection Bureau (the "CFPB") announced it is seeking nominations for members of its Consumer Advisory Board, a panel of consumer experts who will advise the CFPB on emerging trends and practices in the financial services and products industry. Nominations should be submitted on or before March 30, 2012. CFPB Press Release. - CFPB Open Inquiry into Checking Account Overdraft Programs.
On February 22nd, the CFPB launched an inquiry into checking account overdraft programs to determine how these practices are affecting consumers. As part of that inquiry, the CFPB is seeking public input on a prototype "penalty fee box," a disclosure on a consumer's checking account statement that would highlight the amount overdrawn and total overdraft fees charged. The inquiry is being conducted through a data request sent to a number of banks and a Notice and Request for Information from the public. CFPB Press Release. - CFPB Forms Small Business Review Panel.
On February 21st, the CFPB announced the formation of a Small Business Review Panel as part of its initiative to integrate the mortgage disclosure forms that borrowers receive when applying for and closing on a loan. The Small Business Review Panel will solicit feedback from small businesses that make mortgage loans and conduct mortgage closings. CFPB Press Release. - FinCEN Releases CTR and SAR Test Site.
On February 17th, the Financial Crimes Enforcement Network ("FinCEN") announced it has updated the BSA E-Filing System's User Test System Website to allow for testing submissions of batch and computer-to-computer filings of new FinCEN reports, the Currency Transaction Report and Suspicious Activity Report. FinCEN Notice.
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| Commodity Futures Trading Commission |
[Top] |
On February 23rd, the CFTC voted to adopt final rules establishing reporting, recordkeeping, and daily trading records requirements for swap dealers and major swap participants. CFTC Fact Sheet; CFTC Questions and Answers. On February 23rd, the CFTC voted to re-propose for comment new rules establishing minimum block sizes for large notional off-facility swaps and block trades and rules to protect the identities of parties to swap transactions. CFTC Fact Sheet; CFTC Questions and Answers. - CFTC to Host Roundtable Discussion of Customer Protection Measures.
On February 29 and March 1, the CFTC will hold a two-day public roundtable to discuss customer collateral protection. Day one discussions will focus on (i) issues related to the advisability and practicality of implementing the legal segregation with operational commingling model as the segregation model for collateral posted by futures customers; (ii) alternative models for the custody of customer collateral; (iii) enhancing futures commission merchant ("FCM") controls over the disbursement of customer funds deposited for trading on U.S. futures markets; (iv) increasing transparency surrounding a FCM's holding and investment of customer funds; and (v) lessons learned from commodity brokerage bankruptcy proceedings. Day two will focus primarily on (i) the protection of customer funds deposited with FCMs for trading on foreign futures markets; (ii) particular issues associated with entities dually registered with the CFTC as FCMs and the SEC as broker-dealers; and (iii) enhancing the self-regulatory structure. CFTC Press Release. - CFTC Files Opposition to Industry Group's Motion for an Injunction.
On February 18th, Reuters summarized the CFTC's opposition to the motion for a preliminary injunction filed by the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association. The two trade associations are seeking to block the implementation of the CFTC's position limits rule. Opposition.
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| Securities and Exchange Commission |
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- SEC Chairman Addresses the Practicing Law Institute's SEC Speaks.
On February 24th, SEC Chairman Mary L. Schapiro discussed developments at the SEC, including new disclosure requirements, examination programs, enforcement targets, and Dodd-Frank Act implementation. Addressing mutual fund money market reforms, Schapiro stated that investors have been lulled into a false sense of security, which requires changes. She emphasized that the steps taken to stop the "run on the bank" which occurred after the Reserve Primary Fund's net asset value fell below one dollar cannot be replicated. Schapiro implied that structural changes in the form of either floating net asset values and/or capital requirements, combined with limitations or fees on redemptions, are inevitable. Schapiro Remarks. - Chairman Schapiro's Q&A Session.
On February 22nd, the Washington Post summarized the discussion at a question and answer session featuring SEC Chairman Mary L. Schapiro. High-frequency trading and money market mutual funds were among the topics addressed. Q&A Session. Reuters reported Schapiro voiced support for the STOCK Act, which would prohibit insider trading by Congress and its staff. Support. The New York Times' DealBook noted Schapiro's defense of the SEC's policy of allowing respondents to settle without admitting or denying liability. She contends that the SEC's settlement practice continues to have a deterrent effect because it places others on notice and settlements frequently require firms to improve their compliance policies and practices. Settlement Policy. - SEC Expands ETF Investigation.
On February 21st, Reuters reported the SEC's investigation into the exchange-traded fund industry has expanded to include an inquiry into settlement fails. Settlement Fails.
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| Exchanges and Self-Regulatory Organizations |
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The Depository Trust Company
- Automation of Full Call Notification Process for Money Market Instruments is Immediately Effective.
On February 16th, the SEC granted immediate effectiveness to The Depository Trust Company's ("DTC") proposal automating the "full call" notification process for money market instruments and reducing the time frame within which such notices must be submitted to DTC. Comments should be submitted on or before March 16, 2012. SEC Release No. 34-66413. Financial Industry Regulatory Authority
- FINRA Issues Investor Alert on Understanding Brokerage Statements.
On February 23rd, the Financial Industry Regulatory Authority ("FINRA") issued an Investor Alert called "It Pays to Understand Your Brokerage Account Statements and Trade Confirmations" to help guide investors through the key elements of their account statements and trade confirmations. FINRA Press Release. - Mediator Selection Changes Proposed.
On February 22nd, the SEC provided notice of FINRA's filing of a proposed rule change providing the Director of Mediation with discretion to determine whether parties to a FINRA mediation may select a mediator who is not on FINRA's mediator roster. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of February 27. SEC Release No. 34-66441. - FINRA Proposes to Raise Simplified Arbitration Limits.
On February 22nd, the SEC provided notice of FINRA's filing of a proposed amendment to FINRA Rules 12401, 12800, 13401, and 13800 to raise the limit for simplified arbitration from $25,000 to $50,000. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of February 27. SEC Release No. 34-66442. - FINRA Requests Comment on Facilitating the Use of BrokerCheck.
On February 21st, FINRA requested comment on ways to facilitate and increase investor use of BrokerCheck information. Specifically, FINRA seeks comment on potential changes to the information disclosed through BrokerCheck, the format in which the information is presented, and strategies to increase investor awareness of BrokerCheck. Comments should be submitted on or before April 6, 2012. FINRA Regulatory Notice 12-10. - FINRA Publishes Revised Debt Research Conflict of Interest Proposal.
On February 17th, FINRA published for comment a revised debt research conflicts of interest proposal that reflects changes made in response to comments to a concept proposal discussed in Regulatory Notice 11-11. The revised proposal maintains a tiered approach based on whether debt research is distributed to retail or institutional investors. Debt research distributed to retail investors would carry most of the same protections provided to recipients of equity research, while institutional investors could opt in to a framework that exempts such research from many of those provisions. Comments should be submitted on or before April 2, 2012. FINRA Regulatory Notice 12-09. Municipal Securities Rulemaking Board
- MSRB Releases Long-Range Market Transparency Plan.
On February 23rd, the Municipal Securities Rulemaking Board published its long-range market transparency plan. The plan includes an enhanced Electronic Municipal Market Access website, the public availability of yields on inter-dealer trades, improvements in the timing and quality of data available for new issues of municipal securities, improving market-wide access to plan disclosure documents and related information for 529 college savings plans, and potential conflicts of interest disclosure. MSRB Press Release. NASDAQ OMX Group
- Proposed Enhanced Co-Location Services are Immediately Effective.
On February 21st, the SEC granted immediate effectiveness to NASDAQ Stock Market's and NASDAQ OMX PHLX's individually proposed offering of 40 Gb fiber optical bandwidth options for their respective co-location customers. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of February 27.
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| Judicial Opinions |
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- Defendants' Late Trading of Mutual Funds Leads to over $76 Million in Penalties and Disgorgement.
On February 14th, a federal district court, in a 128-page opinion, discussed the late trading and market timing of mutual funds. Although defendants' market timing practices would have violated the securities laws under current precedent, prior to 2003 the law was less clear. Although the SEC failed to establish that the funds in which defendants then traded prohibited market timing, the court found that the defendants' late trading was clearly a violation of the securities laws. The court therefore found the defendants liable for late trading but not market timing. Defendants must pay over $38 million in disgorgement, plus prejudgment interest, and over $38 million in civil penalties. SEC v. Pentagon Capital Management PLC. See also SEC v Pentagon Capital Management, Lit.Rel.No. 22262.
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| Rules Effective Dates |
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- Net Worth Standard for Accredited Investors - Effective February 27, 2012.
The SEC adopted amendments to the accredited investor standards under the Securities Act of 1933 (the "Securities Act") to implement the requirements of Section 413(a) of the Dodd-Frank Act. Section 413(a) requires the definitions of "accredited investor" in the Securities Act rules to exclude the value of a person's primary residence for purposes of determining whether the person qualifies as an "accredited investor" on the basis of having a net worth in excess of $1 million. This change to the net worth standard was effective upon enactment by operation of the Dodd-Frank Act, but Section 413(a) also requires revision of the current Securities Act rules to conform to the new standard. The SEC also adopted technical amendments to Form D and a number of other rules in order to conform them to the requirements of Section 413(a) and to correct cross-references to former Section 4(6) of the Securities Act, which was renumbered Section 4(5) by Section 944 of the Dodd-Frank Act. 76 FR 81793. To view our Client Briefing on this topic, please click here.
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