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Volume 10, no. 5 |
February 9, 2015 |
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This issue of Winston’s Financial Service Update marks the debut of a new monthly feature that we call FINRA – Regulatory Matters at a Glance – What Compliance Officers Need to Know. This feature provides a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month, all in an easily accessible chart form that includes links to relevant documents and rules. We look forward to any comments you may have regarding this feature, including any suggestions that would make it more useful to you. Please send comments and suggestions to Glen Barrentine, the creator of this feature.
We would also like to highlight the February 3rd release by each of the SEC and FINRA of investor bulletins and reports on cybersecurity – a matter that seems to take on added urgency with each passing week. SEC Press Release. FINRA Press Release. Both the SEC Investor Bulletin, written by the Office of Investor Education and Advocacy, and FINRA’s investor alert, Cybersecurity and Your Brokerage Firm, encourage investors to understand their firm's cybersecurity policies and includes advice to help investors safeguard their accounts and personal financial information.
The SEC’s Risk Alert summarizes the Office of Compliance Inspections and Examinations’ recent examination sweep of 57 broker-dealers and 49 investment advisers. The examinations focused on how firms identify cybersecurity risks; establish cybersecurity policies, procedures, and oversight processes; protect their networks and information; identify and address risks associated with remote access to client information, funds transfer requests, and third-party vendors; and detect unauthorized activity.
FINRA’s Report on Cybersecurity Practices provides “an approach to cybersecurity grounded in risk management” that is particularly substantive and that would be useful not only to FINRA’s member firms but to any financial service company, especially one that interacts with clients or customers. Topics covered by FINRA’s report include cybersecurity risk assessment, technical controls, incident response planning, vendor management, staff training, cyber intelligence and information sharing, and cyber insurance.
We believe that the most significant item in FINRA’s report, however, is the report’s focus on the importance of a strong governance framework. The term “governance framework” is used by FINRA to refer broadly “to the establishment of policies, procedures and process to manage and monitor the organization’s regulatory, legal, risk, environmental, and operational requirements in a fashion that is understood within the organization and that informs its management of cybersecurity risk.”
Following the governance framework approach described in FINRA’s report will not only make for a better cybersecurity program but, importantly, will also lead to cybersecurity program documentation that is both consistent with the expectations of FINRA and the SEC, and allow for easier and more effective communications with the regulators around this difficult topic. This is equally true of routine regulatory responses – FINRA member firms should expect cybersecurity preparedness reviews as part of every routine regulatory examination – as well as responses to regulatory inquiries that are triggered by incidents or other demonstrated weaknesses, in which case, documentation of a strong governance framework is likely to lessen the severity of any action taken by FINRA or the SEC and hopefully ward off failure to supervise charges and charges against individuals.
Please contact your regular Winston & Strawn attorney for additional information regarding building a cybersecurity compliance program. |
Glen Barrentine |
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Ten days ago, while discussing a macro-prudential approach to regulation, Federal Reserve Board Governor Daniel K. Tarullo suggested the Board may invoke its authority under the Securities Exchange Act to propose margin rules for firms that are not subject to prudential regulation and who are active in the securities financing market. Tarullo further suggested a policy framework that builds on the traditional investor protection and market functioning aims of securities regulation by incorporating a system-wide perspective. “[T]his new form of regulation might start by strengthening some of the firm- or fund-specific measures associated with those traditional regulatory aims, but then move forward to take into account such considerations as system-wide demands on liquidity during stress periods and correlated risks among asset managers that could exacerbate liquidity, redemption, and fire sale pressures. The specific policies associated with prudential market regulation might be transaction-specific, or apply to certain kinds of business models.” Tarullo Remarks.
The day before Tarullo’s speech, the International Monetary Fund published a study on the securitization market. The study suggests how the securitization process can be reformed to maximize benefits and minimize risks. It also addresses how to strengthen the chain of financial intermediation and what steps can be taken to spur demand. Specifically, the IMF recommends improving the loan origination process; resolving legal ambiguities related to the rights and obligations of servicers, trustees, and investors; establishing secure, transparent, and cost-effective transfer of claims on collateral; standardizing risk definitions; and consistently applying capital charges across asset classes and borders.
In mid-January, the Bank of England published a working paper entitled, “Do contractionary monetary policy shocks expand shadow banking?” Using data from the United States, the paper finds that a contractionary monetary policy shock has a persistent negative impact on the asset growth of commercial banks, but increases the asset growth of shadow banks and securitization activity.
Brigham Young University law professor Christine Hurt, blogging for Conglomerate, questions recent concerns that another securitization bubble, this one involving used car loans, may soon result in financial havoc. View the blog post here.
University of Iowa law professor Robert T. Miller summarized his recent article “The RMBS Put-Back Litigations and the Efficient Allocation of Endogenous Risk Over Time” for the CLS Blue Sky Blog. Miller considers the role the statute of limitations plays in the efficient allocation of residential mortgage-backed securities risk. View the blog post here. |
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On February 6th, the Office of the Comptroller of the Currency (“OCC”) published two Bulletins. The first addresses the December 29, 2014 revisions to the Community Reinvestment Act regulations that became effective January 1, 2015. CRA Revisions Bulletin. The second discusses the Federal Financial Institutions Examination Council’s (“FFIEC”) new appendix, “Strengthening the Resilience of Outsourced Technology Services,” to the “Business Continuity Planning” booklet of the FFIEC Information Technology Examination Handbook. The new appendix ensures that the booklet aligns with regulatory guidance on third-party relationship risk management and incorporates emerging risks, such as cyber resilience risk concerns. FFIEC Information Technology Examination Handbook. |
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The OCC announced it will host a public meeting of the Minority Depository Institutions Advisory Committee on February 18, 2015. OCC Press Release. |
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The OCC will host two workshops in Morristown, New Jersey on March 10-11, 2015 for directors of national community banks and federal savings associations. The Risk Governance workshop on March 10 combines lectures, discussion, and exercises to provide practical information for directors to effectively measure and manage risks. The workshop also focuses on the OCC’s approach to risk-based supervision and major risks in the financial industry. Revised and updated for 2015, the Credit Risk workshop on March 11 focuses on credit risk within the loan portfolio, such as identifying trends and recognizing problems. The workshop also covers the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change. OCC Press Release. |
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On February 4th, the Financial Stability Oversight Council (“FSOC”) voted to adopt certain changes and formalize certain practices relating to its process for reviewing nonbank financial companies for potential designation as systemically important. Under the changes, companies will be informed earlier when they come under review and will be provided additional opportunities to engage with the Council and staff; more information concerning the Council’s designation work will be made public; and designated firms will be given more opportunities to interact and present information to the Council during the annual reevaluation of designations. FSOC Press Release. |
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On February 4th, the Financial Stability Oversight Council extended to March 25, 2015, the date by which comments may be submitted regarding potential risks to U.S. financial stability from asset management products and activities. FSOC Press Release. |
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On February 2nd, the Financial Crimes Enforcement Network (“FinCEN”) renewed the August 11, 2014 geographic targeting order that requires enhanced cash reporting by armored car services and other common carriers of currency at the San Ysidro and Otay Mesa Ports of Entry in California. FinCEN is renewing the GTO for an additional 180 days beginning on February 8, 2015. FinCEN Notice. |
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On February 5th, Securities and Exchange Commission (“SEC”) Commissioner Luis A. Aguilar, addressing the American Retirement Initiative’s Winter 2015 Summit, discussed the need to improve investor protection measures regarding target date funds and municipal securities. Aguilar Remarks. |
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On February 4th, SEC Commissioners Kara M. Stein and Luis A. Aguilar published their dissent from the SEC’s order granting a waiver to Oppenheimer & Co. from the “bad actor” automatic disqualification provision of Securities Act Rule 506(d)(1)(ii). The strongly-worded dissent explains why the exemption represents a departure from the SEC’s long-established criteria for granting waivers; recounts Oppenheimer’s history of recidivism; and questions the Commission’s judgment in allowing Oppenheimer to choose whatever law firm it likes to act as its compliance authority without requiring that the firm be qualified and independent. |
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The SEC has published a list of alternative trading systems with Form ATS on file with the SEC as of February 1, 2015. |
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The SEC announced that David Grim has been named Acting Director of the Division of Investment Management, replacing Norm Champ, the division’s former director, who left the SEC at the end of January. |
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On February 4th, the Commodity Futures Trading Commission (“CFTC”) extended to February 20, 2015, the date by which comments may be submitted in response to LedgerX’s request for registration as a derivatives clearing organization and registration as a swap execution facility for the listing and clearing of fully collateralized, physically settled options on bitcoins. CFTC Press Release. |
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On February 4th, the CFTC announced that a U.S. District Court has entered a consent order imposing a permanent injunction against a bank and ordering the bank to pay $18 million dollars to be returned to a Future Commission Merchant’s (“FCM”) customers. The Court had previously found that in 1992, the FCM opened an account at a predecessor to the bank and designated the account as a customer segregated account. The bank provided two letters to the FCM acknowledging the account contained customer money, would be properly segregated, and maintained in accordance with the Commodity Exchange Act. At that time, however, the bank had no policies, procedures or training specifically applicable to customers of FCMs or customer segregated funds and no employees with responsibility for the account understood the significance of the account designation. During the relevant period, the owner of the FCM, improperly withdrew approximately $36 million from the account while the bank regularly and improperly withdrew account fees from the account. CFTC Press Release. |
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March 2, 2015 |
Transferred OTS Regulations Regarding Possession by Conservators and Receivers for Federal and State Savings Associations. 80 FR 5015. |
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Removal of Transferred OTS Regulations Regarding Rules of Practice and Procedure and Amendments to FDIC Rules and Regulations. 80 FR 5009. |
February 23, 2015 |
Credit Risk Retention. 79 FR 77601. |
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February 23, 2015 |
Credit Risk Retention. 79 FR 77601. |
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February 23, 2015 |
Credit Risk Retention. 79 FR 77601. |
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February 23, 2015 |
Credit Risk Retention. 79 FR 77601. |
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February 23, 2015 |
Credit Risk Retention. 79 FR 77601. |
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March 10, 2015 |
Government Securities Act Regulations: Large Position Reporting Rules. 79 FR 73407. |
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On February 4th, the SEC provided notice of the Chicago Board Options Exchange’s filing of a proposal to adopt Interpretation and Policy .01 to each of Rules 6.41 and 24.8 to describe the process of establishing final leg execution prices when a broker receives from a customer a complex order for open-outcry handling at a total cash price for the order. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of February 9. SEC Release No. 34-74200. |
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On February 3rd, the SEC provided notice of ICE Clear Credit’s proposed adoption of rules for the clearing of additional Standard Emerging Market Sovereign credit default swap contracts for the Republic of Chile, the Republic of Peru, the Republic of Colombia, Ukraine, and the Republic of Poland. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of February 9. SEC Release No. 34-74192. |
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On February 4th, ETF Trends reported NYSE Arca will seek SEC permission to amend its listing rules so that the exchange may more easily list and trade actively managed exchange-traded funds. ETF Proposal. |
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On January 30th, the SEC designated March 17, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding the New York Stock Exchange’s proposal that would amend its continued listing requirements in relation to the late filing of a company’s annual report with the SEC as set forth in Section 802.01E of the Exchange’s Listed Company Manual. SEC Release No. 34-74184. |
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On February 4th, the First Circuit affirmed the dismissal of a shareholder derivative suit alleging that Smith & Wesson made misleading statements about demand for its products. Applying de novo review to the trial court’s finding that the special litigation committee (“SLC”) was independent, the Court finds that no per se rule holds that an SLC's independence is destroyed by either naming a member as a defendant or a members' past approval of a disputed statement. And here, plaintiff offers no evidence of actual bias. In addition, there is inadequate evidence to conclude that SLC counsel was conflicted or that the SLC failed to act in good faith. Sarnacki v. Golden. |
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On January 30th, the Second Circuit denied a petition for panel rehearing of its May 7, 2013 opinion and separate summary order dismissing federal securities law fraud claims against a clearing broker and individual investors. Victims of a “pump and dump” securities fraud scheme sued those who orchestrated the scheme and various groups who allegedly benefited from and participated in the scheme by allowing stock to be placed in their accounts while trading volume and prices rose. In the original opinion, a divided Second Circuit panel held that although plaintiffs pleaded that defendants provided knowing and substantial assistance to the fraud, because plaintiffs did not allege defendants made a direct misrepresentation to plaintiffs, the securities fraud claims against them failed. In the order denying panel rehearing, the Court clarified its reasoning. The Court is not requiring that reliance by a victim on direct oral or written communications by a defendant be shown in every manipulation case. Rather, in a manipulation claim a showing of reliance may be based on “market activity” intended to mislead investors by sending “a false pricing signal to the market,” upon which victims of the manipulation rely. However, the facts here do not involve false pricing signals to the market, but rather misrepresentations to the victims. Fezzani v. Bear, Stearns & Co., Inc. |
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On February 3rd, Standard & Poor’s Financial Services LLC, along with its parent corporation McGraw Hill Financial Inc., settled lawsuits filed by the Justice Department and 19 states and the District of Columbia which alleged that S&P engaged in a scheme to defraud investors in residential mortgage-backed securities (“RMBS”) and collateralized debt obligations (“CDOs”). Under the settlement, S&P agreed to pay $1.375 billion, formally retracted an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States, and agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia. In an agreed statement of facts, S&P also admitted that its decisions on its rating models were affected by business concerns and that relevant people within S&P knew in 2007 that many loans in RMBS transactions S&P were rating were delinquent and that losses were probable. Justice Department Press Release. |
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On February 2nd, Reuters reported retail brokers, in an effort to stem a SEC conflicts of interest investigation, intend to voluntarily disclose to their customers the order routing payments they receive from market makers. Maker Taker. |
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On January 30th, CFO.com summarized the results of a KPMG survey on the new demands being placed on those serving on corporate audit committees Audit Committees. |
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We are pleased to bring you the next webinar in The Real Deal series, which covers current trends, challenges, and legal topics pertinent to securities and corporate governance. Webinar. |
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Litigation – Fortnightly Financial News is written by lawyers in Winston & Strawn LLP’s London office, focusing on developments within the financial services industry. Newsletter. |
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On January 19, 2015, the Ministry of Commerce (“MOFCOM”) of the People’s Republic of China (“PRC”) released a draft of a proposed new Foreign Investment Law (the “Draft Law”) for public comment and an accompanying explanatory note (the “Note”). MOFCOM will seek input from the local and international legal communities on the Draft Law until February 18, 2015. Briefing. |
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For more information regarding the Financial Services Update and the Financial Services Practice please contact: Basil V. Godellas, Chair Financial Services Corporate Practice Group at
+1 (312) 558-7237 or bgodellas@winston.com, or click here to see a list of Winston & Strawn professionals with practices in the financial services industry. |
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