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Volume 10, no. 3 |
January 26, 2015 |
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Following the recent conclusion of the SEC’s two-year “presence exam” initiative to examine newly regulated private equity managers, the co-head of the SEC’s Office of Compliance and Inspections private funds unit, Igor Rozenblit, discussed last week enforcement actions related the completed exams, and also gave a preview of an upcoming related exam initiative. DealBook and Reuters both reported on Mr. Rozenblit’s remarks.
Speaking at Private Equity International’s CFO/COO 2015 Forum in Manhattan last week, Mr. Rozenblit said that, although its “presence exam” initiative has been complete for approximately three months, any enforcement cases stemming from the exams would generally take months or years of investigation and negotiation to develop and surface.
“Enforcement investigations typically take a long time,” Mr. Rozenblit said. “A rocket investigation would be a year, a year and a half. An average investigation would be two years-plus, and in some cases longer than that.”
Mr. Rozenblit also cautioned that it remains too early to analyze the overall impact of the presence exams. Although past speeches by SEC officials have noted that the Commission’s exams had uncovered “violations of law or material weaknesses in controls” in more than half of the funds examined – many such issues involving expense allocation and fee disclosure – the Commission is not yet prepared to communicate overall findings or guidance to the market.
However, Mr. Rozenblit also noted that his private funds unit will soon begin another round of examinations, this time moving “beyond buyout” managers to look at “adjacent illiquid asset classes” and “liquid asset classes.” While he did not mention specifically targeted classes, DealBook speculates that exams could focus on hedge funds and managers focused on real estate, timber and energy assets.
Winston & Strawn LLP will continue to monitor events related to the SEC’s examination of private equity managers. |
| John Albers |
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On January 16th, SEC Chair Mary Jo White announced she has asked the SEC staff to review Securities Exchange Act Rule 14a-8(i)(9), which permits the exclusion of a shareholder proposal from a company’s proxy if that proposal "directly conflicts" with a management proposal. As a result of that request, the Division of Corporation Finance announced it will not express any views during this proxy season concerning the application of Rule 14a-8(i)(9). SEC Statement.
That surprising announcement, which one blog post characterized as a “punt,” followed the Corporation Finance Division’s December 1, 2014 no-action letter to Whole Foods Markets, which sought to exclude from its proxy statement a shareholder proposal on the adoption of a corporate bylaw that would give shareholders who own at least 3 percent of the company’s stock for at least three years the right to nominate directors. In its no-action letter, the Division allowed Whole Foods to exclude the proposal under Rule 14a-8(i)(9) because the company was submitting its own proposal which would permit board nominations by those owning 9 percent of its stock for five years.
Three days before Chair White asked the staff to review Rule 14a-8(i)(9), the author of the Whole Foods shareholder access proposal blogged about it for the Harvard Law School Forum on Corporate Governance and Financial Regulation. View the blog post here.
In his blog, James McRitchie included the appeal he submitted to the SEC in response to the no-action letter. The appeal recounted the history of Rule 14a-8(i)(9) and contended that: “The staff’s position effectively denies shareholders the right to vote on competing proposals involving similar or related topics solely because the proposals contain different terms or thresholds. The interpretation effectively limits shareholders to consideration of proposals sponsored by the board of directors and eliminates any opportunity for shareholders to present alternative criteria. The interpretation is an unnecessary limitation on the shareholder franchise, effectively depriving shareholders of rights that exist under state law, and is inconsistent with the Commission’s intent in adopting subsection (i)(9).” McRitchie further noted that proxy statement “[e]xclusion also cannot occur where the bylaw has been adopted ‘in response to’ a shareholder proposal. The circumstances surrounding the bylaw proposed by Whole Foods suggests that it was adopted ‘in response to’ the proposal submitted in this case.”
On January 16th, in conjunction with Chair White’s request, the Division of Corporation Finance withdrew its Whole Foods no-action letter. And as a number of news outlets noted, shareholder advocates cheered. See, e.g., CFO.com, New York Times. But the true effect of the SEC’s punt won’t be known until after the staff completes its review and makes public its findings. |
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| On January 22nd, the Office of the Comptroller of the Currency (“OCC”) issued the “Government Securities Act” booklet of the Comptroller’s Handbook. This new booklet, part of the Securities Compliance series, consolidates certain guidance from the Comptroller’s Handbook for Compliance, “Securities Activities” booklet, issued in September 1991, and the Comptroller’s Handbook booklet “Investment Securities,” issued in March 1990. The new booklet also replaces Section 563, “Government Securities Act,” issued in May 1998 as part of the Office of Thrift Supervision Examination Handbook for the examination of federal savings associations. OCC Bulletin 2015-5. |
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| The OCC will host a workshop in Miami, Florida on February 23-25, 2015 for directors of national community banks and federal savings associations. The Building Blocks for Directors workshop combines lectures, discussion, and exercises to provide practical information on the roles and responsibilities of board participation. OCC Press Release. |
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| On January 21st, Reuters described the staff proposals unveiled at the Financial Stability Oversight Council’s (“FSOC”) open meeting. The proposals are aimed at making more transparent, the Council’s procedures for designating financial institutions as systemically important. Transparency. See also DealBook. |
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| On January 20th, the Consumer Financial Protection Bureau (“CFPB”) published final amendments to the “Know Before You Owe” mortgage disclosure rules. The changes address when consumers will receive updated disclosures after locking in an interest rate and how consumers receive information regarding certain construction loans. Under the final rule, creditors are required to provide a revised Loan Estimate within three business days after a consumer locks in a floating interest rate. The final rule also contains a minor addition on the Loan Estimate form for loans that involve new home construction. The change creates a space on the Loan Estimate form where creditors could include language informing consumers that they may receive a revised Loan Estimate for a construction loan that is expected to take more than 60 days to settle. The amendments are effective August 1, 2015. CFPB Press Release. |
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| On January 20th, the Financial Crimes Enforcement Network published the quarterly SAR Stats update. SAR Stats Webpage. |
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| The Securities and Exchange Commission’s (“SEC”) Investor Advisory Committee will meet on February 12, 2015. Written statements should be submitted on or before February 12, 2015. SEC Release No. 33-9707. |
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| On January 21st, the SEC’s Division of Economic and Risk Analysis published two staff working papers: “Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets” and “High-Frequency Trading Synchronizes Prices in Financial Markets.” |
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| On January 21st, the SEC announced that Norm Champ, Director of the Division of Investment Management, will leave the agency later this month. SEC Press Release. |
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| On January 20th, the SEC announced it intends to establish the Equity Market Structure Advisory Committee. The Committee will provide the Commission with perspectives on the structure and operations of the U.S. equities markets, as well as advice and recommendations on matters related to equity market structure. No more than seventeen voting members will be appointed to the Committee. The members will represent a cross-section of those directly affected by, interested in, and/or qualified to provide advice to the Commission on matters related to equity market structure. SEC Release No. 34-74092. |
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| On January 16th, SEC Chair White announced she has asked SEC staff to review Securities Exchange Act Rule 14a-8(i)(9), concerning the exclusion of a shareholder proposal that "directly conflicts" with a management proposal. Because of that review, the Division of Corporation Finance will not express any views during this proxy season concerning the application of Rule 14a-8(i)(9). White Statement. |
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| On January 23rd, the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight announced that swap dealers and major swap participants may furnish the annual reports of their Chief Compliance Officers through WinJammer, and do not need to use the CFTC’s web portal. CFTC Press Release. |
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| On January 23rd, the Financial Times quoted CFTC Chair Timothy Massad as saying that the agency may extend the deadline for banks’ compliance with margin requirements for over-the-counter swap trades. Extended Deadline. |
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| On January 21st, the CFTC announced it has issued an Order of Registration to the Tokyo Commodity Exchange, Inc., a Foreign Board of Trade located in Tokyo, Japan. Under the Order, TOCOM is permitted to provide its identified members or other participants located in the U.S. with direct access to its electronic order entry and trade matching system to trade futures contracts on metals, fuels, rubber and agricultural commodities and futures and option contracts on gold. In the Matter of the Application of Tokyo Commodity Exchange, Inc. On January 22nd, the CFTC announced the issuance of an Order of Registration to Bursa Malaysia Derivatives Berhad, a Foreign Board of Trade located in Kuala Lumpur, Malaysia. Under the Order, BMD is permitted to provide its identified members or other participants located in the U.S. with direct access to its electronic order entry and trade matching system to trade agricultural commodity, interest rate and security index futures and option contracts. In the Matter of the Application of Bursa Malaysia Derivatives Berhad. On January 22nd, the CFTC also announced it has issued an Order of Registration to the Singapore Exchange Derivatives Trading Limited, a Foreign Board of Trade located in Singapore. Under the Order, SGX-DT is permitted to provide its identified members or other participants located in the U.S. with direct access to its electronic order entry and trade matching system to trade equity index, interest rate, commodity and foreign exchange futures and options contracts. In the Matter of the Application of Singapore Exchange Derivatives Trading Limited. |
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| January 1, 2015 |
Appraisals for Higher-Priced Mortgage Loans Exemption Threshold Adjustment-Final Rule. 79 FR 78296. |
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Home Mortgage Disclosure (Regulation C) Adjustment to Asset-Size Exemption Threshold. 79 FR 77854. |
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Regulatory Capital Rules, Liquidity Coverage Ratio: Interim Final Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions. 79 FR 78287. |
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Consumer Leasing (Regulation M). 79 FR 56482. |
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Truth in Lending (Regulation Z). 79 FR 56483. |
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Truth in Lending (Regulation Z) Adjustment to Asset-Size Exemption Threshold. 79 FR 77855. |
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Truth in Lending (Regulation Z) Annual Threshold Adjustments (CARD ACT, HOEPA and ATR/QM). 79 FR 48015. |
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| February 23, 2015 |
Credit Risk Retention. 79 FR 77601. |
| January 20, 2015 |
Loans in Areas Having Special Flood Hazards. 79 FR 75742. |
| January 1, 2015 |
Assessments. 79 FR 70427. |
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Community Reinvestment Act Regulations. 79 FR 77852. |
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Annual Stress Test. 79 FR 69365. |
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Regulatory Capital Rules: Regulatory Capital, Revisions to the Supplementary Leverage Ratio. 79 FR 57725. |
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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. |
| January 1, 2015 |
Community Reinvestment Act Regulations. 79 FR 77852. |
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Appraisals for Higher-Priced Mortgage Loans Exemption Threshold Adjustment-Final Rule. 79 FR 78296. |
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Regulatory Capital Rules, Liquidity Coverage Ratio: Interim Final Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions. 79 FR 78287. |
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Concentration Limits on Large Financial Companies. 79 FR 68095. |
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Truth in Lending (Regulation Z). 79 FR 56483. |
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Consumer Leasing (Regulation M). 79 FR 56482. |
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Regulatory Capital Rules: Regulatory Capital, Revisions to the Supplementary Leverage Ratio. 79 FR 57725. |
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| January 20, 2015 |
Appraisals-Availability to Applicants and Requirements for Transactions Involving an Existing Extension of Credit. 79 FR 75746. |
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| February 23, 2015 |
Credit Risk Retention. 79 FR 77601. |
| January 2, 2015 |
Annual Stress Test-Schedule Shift and Adjustments to Regulatory Capital Projections. 79 FR 71630. |
| January 1, 2015 |
Appraisals for Higher-Priced Mortgage Loans Exemption Threshold Adjustment-Final Rule. 79 FR 78296. |
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Community Reinvestment Act Regulations. 79 FR 77852. |
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Subordinated Debt Issued by a National Bank. 79 FR 75417. |
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Regulatory Capital Rules: Regulatory Capital, Revisions to the Supplementary Leverage Ratio. 79 FR 57725. |
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| February 23, 2015 |
Credit Risk Retention. 79 FR 77601. |
| January 1, 2015 |
Nationally Recognized Statistical Rating Organizations. 79 FR 55077.
[This rule is effective November 14, 2014; except the amendments to Sec. 240.17g-3(a)(7) and (b)(2) and Form NRSRO, which are effective on January 1, 2015; and the amendments to Sec. 240.17g-2(a)(9), (b)(13) through (15), Sec. 240.17g-5(a)(3)(iii)(E), (c)(6) through (8), Sec. 240.17g-7(a) and (b), and Form ABS-15G, which are effective June 15, 2015. The addition of Sec. Sec. 240.15Ga-2, 240.17g-8, 240.17g-9, 240.17g-10, and Form ABS Due Diligence-15E are effective June 15, 2015.] |
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| January 16, 2015 |
Cuban Assets Control Regulations. 80 FR 2291. |
| March 10, 2015 |
Government Securities Act Regulations: Large Position Reporting Rules. 79 FR 73407. |
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| On January 22nd, the SEC approved BATS Y-Exchange’s request to extend until January 31, 2016, an exemption from the Sub-Penny Rule in connection with the operation of the Exchange’s Retail Price Improvement Program. SEC Release No. 34-74115. |
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| On January 21st, Reuters reported CME Group has authorized its Global Command Center to adjust or remove daily price limits and to determine whether specified trading halts will be observed. The authorization was made in light of the Swiss National Bank’s decision to remove the currency peg between the Swiss franc and Euro. Emergency Measures. |
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| On January 20th, the Financial Industry Regulatory Authority issued an Information Notice on the new Section 31 fee rate applicable to specified securities transactions on the exchanges and in the over-the-counter markets. The new rate will decrease from its current rate of $22.10 per million dollars in transactions to a new rate of $18.40 per million dollars in transactions. |
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| On January 16th, the SEC designated March 2, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding ICE Clear Credit’s proposed updates to its Operational Risk Management Framework. SEC Release No. 34-74082. |
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| On January 16th, the SEC provided notice of ICE Clear Credit’s filing of proposed revisions to the ICC Treasury Policies and Procedures that would provide for the use of a Federal Reserve Account, provide for the use of a committed repo facility, and provide for engagement of outside investment managers to invest guaranty fund and margin cash pursuant to ICC’s USD and Euro investment guidelines. These revisions do not require any changes to the ICC Clearing Rules. Comments should be submitted on or before February 13, 2015. SEC Release No. 34-74084. |
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| On January 16th, the SEC approved ICE Clear Europe’s proposed revisions to the ICE Clear Europe CDS End-of-Day Price Discovery Policy to incorporate enhancements to its price discovery process. SEC Release No. 34-74085. |
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| On January 22nd, the SEC provided notice of the Miami International Securities Exchange’s proposed adoption of Rule 519A, Risk Protection Monitor, to provide new risk protections for orders entered by Members on the Exchange. The proposed functionality is similar to the existing Aggregate Risk Protections available to Market Makers that provide risk protections for Market Maker quotations. The Exchange also proposes to codify existing functionality regarding the Aggregate Risk Manager to provide additional transparency in the Rule to Members regarding the current functionality. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of January 26. SEC Release No. 34-74118. |
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| On January 21st, the National Futures Association announced that effective January 22, 2015, the minimum security deposits required to be collected and maintained by FDMs for the Swiss franc, Swedish krona, and Norwegian krone will be increased. Additional increases in these currencies or other currencies will be made as warranted by market conditions. NFA Notice to Members I-15-04. |
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| On January 16th, the SEC instituted proceedings to determine whether to approve or disapprove NYSE Arca’s and NYSE MKT’s separately submitted proposals that would remove their respective quote mitigation plans. Comments should be submitted on or before February 13, 2015. Rebuttal comments should be submitted on or before February 27, 2015. |
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| On January 20th, the Third Circuit addressed whether the purchases and sales of securities issued by U.S. companies through U.S. market makers acting as intermediaries for foreign entities constitute “domestic transactions” under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). Using off-shore brokerage accounts defendant manipulated the prices of four OTC stocks. On appeal, he sought to overturn his securities fraud convictions by arguing that they were improperly based on an extraterritorial application of U.S. law. Although the Third Circuit found that the OTC Bulletin Board and OTC Pink Sheets are not national exchanges under Morrison, it did find that defendant’s manipulative stock trades were “domestic transactions” under Morrison. A government witness testified that all of the manipulative trades were facilitated by U.S. market makers and at least some of the relevant transactions required the involvement of a purchaser or seller working with a market maker and committing to a transaction in the United States, incurring irrevocable liability in the United States, or passing title in the United States. The record also contained evidence of specific instances in which the stocks were bought or sold at defendant’s direction from entities located in the United States. The transactions were therefore “domestic” and the convictions were therefore affirmed. U.S. v. Georgiou. |
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| On January 20th, the U.S. Supreme Court denied a petition for certiorari submitted by retailers who challenged the D.C. Circuit’s ruling upholding the Federal Reserve Board’s cap on debit card transaction fees. See NACS v. Board of Governors, 14-200 (S.Ct.). See also Reuters. |
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| On January 16th, the Tenth Circuit affirmed the dismissal of a putative class action securities fraud complaint. Plaintiffs allege a gold mining company and certain of its officers made material misstatements concerning the company’s gold production statistics. The Tenth Circuit found that plaintiffs failed to allege particularized facts in addition to the alleged accounting violations sufficient to show fraudulent intent. It is plausible and prudent for an executive to investigate and confirm alleged discrepancies before disclosing them publicly. And plaintiffs’ bald statements concerning allegedly improper Section 302 Sarbanes-Oxley certifications at best describe negligence, not falsity. In Re: Gold Resource Corporation Securities Litigation. |
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| On January 23rd, Reuters reported the Basel Committee on Banking Supervision will review its zero-risk weighting rule for sovereign debt held by banks. Weighty Review. |
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| On January 21st, CFO.com summarized the findings of a study conducted by the Hong Kong University of Science and Technology on the adoption of compensation clawback policies. The study found that while the adoption of such policies reduces the likelihood of one kind of earnings manipulation, it increases the chances of another. Unintended Consequences. |
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| On January 20th, Peter J. Henning, writing for DealBook outlined the implications of the Second Circuit’s insider trading opinion in U.S. v. Newman, where the Court held that prosecutors must prove beyond a reasonable doubt that a downstream tippee knew that an insider disclosed confidential information and did so in exchange for a personal benefit. DealBook noted the cases affected by the decision and the Justice Department’s response. Insider Trading. |
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| On January 19th, Reuters reported that nine money managers intend to create their own private trading exchange in order to reduce costs. Going Dark. |
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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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This briefing is designed to remind our clients that manage separate accounts or private funds, whether hedge funds, private equity funds, commingled funds, collateralized loan obligations, or commodity pools, of certain obligations that may be applicable to them as “Investment Managers” under various U.S. federal and state laws and regulations. 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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