Weekly RoundUp
November 24, 2015

Financial Services Weekly News

MSRB and FINRA Issue Coordinated Guidance on Best Execution by Brokers and Dealers. On Nov. 20 the MSRB announced that it had issued Implementation Guidance on MSRB Rule G-18, on Best Execution. The guidance includes questions and answers on the new best-execution rule, G-18, which becomes effective on March 21, 2016, and the exemption for transactions with sophisticated municipal market professionals (SMMPs) codified in Rules G-48 and D-15. On the same day, FINRA announced that it had issued Regulatory Notice 15-46, Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets, on the responsibilities of member firms under existing FINRA Rule 5310. The MSRB and FINRA best execution rules require firms to use reasonable diligence to ascertain the best market for a customer order to buy or sell securities and to obtain the most favorable terms possible under prevailing market conditions for the customer. Both documents contain a note 1 referencing the guidance of the other agency and stating the belief that the guidance provided is consistent with that of the other agency, except in two respects. The first difference is that the FINRA rule requires that firms conduct regular and rigorous review for best execution. The second is that FINRA requires firms to make every effort to execute a marketable customer order that it receives fully and promptly, while paragraph .03 of MSRB Rule G-18 recognizes that, in certain market conditions, dealers may need more time to use reasonable diligence to ascertain the best market for the subject security. Many firms are members of both the MSRB and FINRA, and the second difference in particular may require those firms, in some cases, to thread the needle carefully to ensure compliance with both rules.

The Roundup is being published a day early because of the Thanksgiving holiday this week. While we spend time with loved ones and take a short break from thinking about regulatory compliance, it is a good time to be thankful that we live in a nation of laws. At a recent panel discussion, we heard the general counsel of an international corporation say that he had never fully appreciated what it meant to live and work in a nation with a strong rule of law, until he had to do business in countries where the rule of law does not matter. A good reminder in a challenging time.

Regulatory Developments

SEC Proposes Amendments to Regulation ATS to Shine a Light on Dark Pools

On Nov. 18 the SEC announced that it had issued Release No. 34-76474 proposing amendments to Regulation ATS, applicable to automated trading systems, and new Form ATS-N to be filed by every NMS Stock ATS. Regulation ATS exempts certain automated trading systems registered as broker-dealers from registration as a national exchange. ATSs may accommodate trades in a variety of securities, including equity and fixed-income securities. Dark pools, which facilitate generally large transactions by institutional investors in exchange-traded equity securities (NMS stock) off of the exchanges, are registered as ATSs. The SEC proposes to amend Regulation ATS to define a category of “NMS Stock ATS” subject to heightened disclosure requirements. Form ATS-N, which would be available to the public on EDGAR after filing, would require disclosure by each NMS stock ATS about the activities of its broker-dealer operator and the operator’s affiliates, and the manner of operations of the NMS Stock ATS. Comments on the proposal are due 60 days after publication in the Federal Register.

SEC Grants Conditional Exemption from Rule 10b-10(a) Confirmation Requirements of Certain Money Market Fund Trades

On Nov. 19 the SEC issued Release No. 34-76480, providing a conditional exemption from the confirmation requirements of Exchange Act Rule 10b-10(a) for transactions in shares of institutional prime money market funds. The exemption was first announced in a request for comments issued on July 23, 2014, in coordination with the adoption of amendments to Rule 2a-7 of the Investment Company Act that, among other things, require institutional prime money market funds, as defined in the Rule, to sell and redeem fund shares based on the current market-based value of the securities held in their portfolios (i.e., transact at a “floating” net asset value (NAV)). For more information about Money Market Fund Reform, please see our August 2014 client alert summarizing significant changes and the Aug. 12, 2015 Roundup for information about updates to the Money Market Fund Reform FAQs.

Federal Agencies Release Two New Volcker Rule FAQs

The Federal Reserve Board, the OCC, the FDIC, the SEC and the CFTC—the agencies responsible for implementing and enforcing the Volcker rule—released on Nov. 20 two additional FAQs and responses addressing the Volcker rule. The first FAQ relates to the termination of market-making activity by a banking entity that conducted permissible market-making activity in reliance upon the market-making exemption from the Volcker rule. The response to the FAQ confirms that a banking entity that terminates permissible market-making activity may hold and dispose of any residual market-making positions provided the banking entity (1) hedges the risks of such positions in accordance with the requirements of the risk-mitigating hedging exemption from the Volcker rule and (2) sells or unwinds such positions as soon as commercially practicable. A banking entity may not hold residual positions unhedged since subsequent sales of those residual positions would be characterized as impermissible proprietary trading, nor may a banking entity continue to rely upon the market-making exemption to hold residual positions once it terminates its market-making activity. The second FAQ relates to the so-called “Super 23A” provision of the Volcker rule, which prohibits a banking entity that serves as investment manager, investment adviser, or sponsor to a covered fund or that organizes and offers a covered fund in reliance upon the exemption that permits a banking entity to organize and offer a covered fund as part of a trust, fiduciary or investment or commodity trading advisory business, and any affiliate of such a banking entity, from entering into any transaction with the covered fund or any covered fund controlled by that covered fund if the transaction would be a covered transaction for purposes of Section 23A of the Federal Reserve Act. The response to the FAQ clarifies that, as a general matter, after Jul. 21, 2015, a banking entity may not enter into a covered transaction with a covered fund, including any increase in the amount of, extension of maturity of or adjustment to the interest rate or other material term of an extension of credit.

Enforcement & Litigation

FINRA Fines Firm $1.4 Million for Violating Regulation SHO and Short Interest Reporting Rules

FINRA announced on Nov. 19 that it had fined Deutsche Bank Securities Inc. (Firm) $1.4 million for violating SEC Regulation SHO and FINRA's short interest reporting rule and for related supervisory failures. Regulation SHO generally allows firms to track their positions in a security from certain trading operations or trading desks separately from other positions maintained at the firm through the use of an "aggregation unit." Reg SHO requires, among other things, that in determining the net positions of aggregation units, firms cannot include the securities positions of a non-U.S.-broker-dealer affiliate. In the Letter of Acceptance, Waiver and Consent, FINRA found that for over 10 years, the Firm had been including securities positions of a non-U.S.-broker-dealer affiliate in numerous aggregation units when determining each unit's net position. FINRA Rule 4560 (the successor of NASD Rule 3360) requires firms, with certain exceptions, to regularly report their total "short" positions in all customer and proprietary firm accounts in equity securities. These short positions must be reported on a gross, rather than a net, basis. FINRA found that from April 2004 to September 2012, the Firm reported the netted positions in its financial aggregation account as the firm's short interest positions for that particular day. FINRA also found that the Firm's supervisory system with respect to its aggregation unit structure and short interest reporting was not reasonably designed to detect and prevent such rule violations during the relevant time periods. In concluding this settlement, the Firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

Goodwin Procter News

Goodwin Procter Earns Top Rating in 2016 Corporate Equality Index

Goodwin Procter was recently named to the Human Rights Campaign (HRC) Foundation’s “Best Places to Work for LGBT Equality” list, a distinction awarded to businesses who receive the top score of 100 percent on the organization’s benchmark Corporate Equality Index (CEI) report. The CEI is a national benchmarking survey and report on corporate policies and practices related to LGBT workplace equality and includes companies from all industries and geographies across corporate America. Goodwin’s GLBT Initiative principally focuses on recruiting, retaining and advancing GLBT talent. The Initiative also seeks to create a welcoming, inclusive and supportive environment, and to build a strong network of GLBT professionals and allies.