Weekly RoundUp
October 21, 2015

Financial Services Weekly News

SEC Commissioners Preview Regulatory Ideas for Treasury Market and ETFs. On Oct. 20 SEC Chair Mary Jo White gave the keynote address at the Evolving Structure of the U.S. Treasury Market Conference of the Federal Reserve Bank of New York, “Taking Stock of Treasury Market Regulation.” She compared changes in the Treasury market and the volatility in the market on Oct. 15, 2014, with changes in the equities markets caused by, among other things, high frequency trading, and the Flash Crash of May 6, 2010. Among the types of changes she believes the SEC should consider putting in place are oversight of the operational integrity of market participants, including the use and risk management of algorithms used by participants, the imposition of volatility moderators, like circuit breakers, and the regulation of intermediaries. In particular, on the last point, she said that the SEC, together with other regulators, should re-assess the exemption of government securities trading platforms from registration as alternative trading systems under Regulation ATS. On Oct. 15, Commissioner Luis Aguilar spoke to the SEC’s Investor Advisory Committee on “How Can the Markets Best Adapt to the Rapid Growth of ETFs.” Commissioner Aguilar noted that the IAC had on its agenda the subject of the pricing of exchange traded funds (ETFs). He outlined several questions he hoped the IAC would consider, including: whether trading in ETFs should be halted whenever a significant number of their portfolio assets are subject to a trading halt ● whether the limit up/limit down rules need to be revised so the arbitrage mechanism ETFs use can function during periods of acute volatility, without triggering an excessive number of trade halts ● whether potential uncertainty about when trades will be broken inhibits the efficient pricing of ETFs, for example, by threatening the ability of liquidity providers to hedge their positions ● how liquidity providers for ETFs can be better incentivized to participate during periods of extreme volatility ● and whether and how the growth of ETFs and their proliferation into less liquid asset classes has challenged the effectiveness of the ETF arbitrage and pricing mechanisms.

Regulatory Developments

FINRA Requests Comment on Rules Relating to Financial Exploitation of Vulnerable Adults

On Oct. 15 FINRA published Regulatory Notice 15-37, requesting comment on proposed amendments to FINRA Rule 4512 (Customer Account Information) and the adoption of new FINRA Rule 2165 (Financial Exploitation of Specified Adults). The focus of the rules is on providing member firms with means to respond to situations in which they believe that financial exploitation of seniors and other vulnerable adults by other persons is occurring or may occur. Comments on the proposals are due by Nov. 30.

Client Alert: CFPB Issues New Mortgage Disclosure Rule

Goodwin Procter issued a client alert regarding the CFPB’s issuance of a final rule amending Regulation C, which implements the Home Mortgage Disclosure Act (HMDA). The new HMDA rule changes (1) the type of institutions that must collect, report, and disclose information about their mortgage lending activity, (2) what transactions are subject to the HMDA rule, (3) what information must be collected, recorded, and reported, and (4) the process for reporting and disclosing data. Because most of the substantive provisions of the final rule do not take effect until 2018, financial institutions have some (but not much) time to adjust their collection and reporting systems to comply with the new rule.

Client Alert: Commerce Department Survey of Financial Services Transactions with Foreign Persons Due Nov. 1, 2015

Goodwin Procter’s Private Investment Funds practice issued a client alert, written by partner David Watson, regarding the Commerce Department’s release of a new BE-180 Survey of Financial Services Transactions and related guidance. U.S. financial services providers – including most private fund managers – may be required to complete a survey of their cross-border financial services transactions as early as Nov. 1, 2015. The BE-180 benchmark survey collects detailed information about U.S. financial services providers' sales to, and purchases from, foreign persons of financial services transactions for the 2014 fiscal year.

Enforcement & Litigation

SEC Charges Six Firms for Short Selling Violations in Advance of Stock Offerings

On Oct. 14 the SEC announced that it had settled enforcement actions with six firms based on alleged violations of Rule 105 of Regulation M, which prohibits persons from purchasing shares in public stock offerings after selling short the same stocks. Four of the firms, Harvest Capital Strategies LLC, J.P. Morgan Investment Management Inc.Omega Advisors, Inc. and Sabby Management LLC, are investment advisers registered with the SEC. Auriga Global Investors, Sociedad de Valores, S.A., is a foreign firm registered in Spain and War Chest Capital Partners LLC is an unregistered investment adviser. The firms were fined a total of more than $2.5 million, and War Chest Capital Partners, which had previously been sanctioned for Rule 105 violations, was also barred from participating in public stock offerings for one year. The SEC noted that the Division of Enforcement had taken a zero tolerance approach to Rule 105 violations, in what it called its Rule 105 Initiative, bringing enforcement actions on every violation over a de minimis amount that had come to its attention. As a result, the SEC stated, Rule 105 violations detected by the Division in the years after the commencement of the Initiative had decreased by approximately 90% over violations in the period prior to the Initiative.

FINRA Sanctions Santander for Violations Related to Sales of Puerto Rico Bonds 

On Oct. 13, FINRA announced enforcement action against Santander Securities LLC (Firm), which was settled with a Letter of Acceptance, Waiver and Consent (AWC). According to the AWC, FINRA found that from Dec. 2012 through Oct. 2013, the Firm used an inaccurate risk-calculation tool to assess the suitability of Puerto Rican municipal bonds. The Firm’s procedures did not require a review of the tool, which the Firm’s representatives used when recommending products to customers. FINRA also found that the Firm had failed to reasonably supervise employee trading in its Puerto Rico office for purposes of mitigating potential conflicts of interest. Because the Firm did not have adequate systems in place, it failed to detect approximately 400 customer orders that were filled from the proprietary holdings of the customers’ individual brokers. The Firm, which did not admit or deny the findings, consented to their entry and agreed to pay approximately $6.4 million in restitution and fines.

Goodwin Procter News

Laura Hodges Taylor Recognized as Leader in Diversity

Laura Hodges Taylor, partner in the firm’s Financial Institutions Group, was honored by the Boston Business Journal on Oct. 20 as a 2015 Leader in Diversity in the Corporate Leadership Category. The Leaders in Diversity Awards is an annual program that honors companies and businesspeople for their leadership in promoting inclusiveness and economic opportunity.