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Weekly RoundUp
August 5, 2015

Financial Services Weekly News


Two Commissioners Report on Their Agencies. In a speech to the U.S. Chamber of Commerce on Aug. 4, SEC Commissioner Daniel M. Gallagher gave what he described as his swan song – his last formal speech as Commissioner. The centerpiece of his speech was a criticism of the Dodd-Frank Act which he said “has backfired, strangling our economy, increasing the fragility of the financial system, and politicizing our independent financial regulators.” He placed much of the blame for the political divide among SEC Commissioners on the Dodd-Frank Act and the fact that, in his view, the Act is “largely a series of ill-formed mandates that need to be interpreted and implemented to have any practical effect.” His criticism of the Dodd-Frank Act extended beyond the SEC mandates – such as conflict minerals rulemaking – to the constitution of the Financial Stability Oversight Council (FSOC) and the international Financial Stability Board (FSB) which, he says, are too heavily weighted with prudential regulators, leaving capital markets regulators, like the SEC and CFTC, with too little voice. Commissioner Gallagher then turned to the work of the SEC itself. While he was critical of the Division of Corporation Finance, especially with respect to its positions on executive pay disclosure and shareholder proposal reform, he was generally more positive in his remarks about the work of the Investment Management Division, the Enforcement Division and the newly created Division of Economic and Risk Analysis. Finally, with respect to the Division of Trading and Markets, he noted that it “needs to… start taking on the hard work of genuine, holistic market structure reform.” He specifically mentioned the need for a comprehensive program for oversight of the fixed income markets and previously proposed reforms of the transfer agent rules and settlement cycle.

On the same day, CFTC Commissioner J. Christopher Giancarlo issued a statement he titled “Six Month Progress Report on CFTC Swaps Trading Rules: Incomplete Action and Fragmented Markets.” The statement was intended as a progress report on the issues discussed in his Jan. 29, 2015 white paper. The eight issues listed included (1) methods of execution – what he called the “artificial and legally unwarranted segmentation between Required Transactions and their limited execution methods and Permitted Transactions and their broad execution methods, (2) the requirement that block transactions occur away from a swaps execution facility (SEF) while non-block transactions take place on the facility and (3) reforming the CFTC’s “made available to trade” process, put in place because of the requirement that a clearing mandated swap be executed on an SEF unless no SEF makes the swap available for trading. Other issues included the void ab initio policy, confirmations for uncleared swaps, the embargo rule, SEF core principles and enhanced professionalism in the swaps market. Commissioner Giancarlo found that in most cases there had been no action by the Commission, or only temporary fixes in the form of no-action or similar interpretive letters. He concluded his statement by saying that if the CFTC does not make a more concerted effort to fix its swaps trading rules in accordance with the letter and spirit of Title VII of the Dodd-Frank Act, “U.S. swaps trading and liquidity will continue to suffer and Congress’s goals of promoting swaps trading on platforms and pre-trade price transparency will not be realized. Furthermore, the CFTC will have a difficult time achieving equivalence with European and other foreign swaps trading regimes, which are not following the CFTC’s prescriptive futures-based approach to swaps trading.” This result will, he stated, “only perpetuate global swaps market fragmentation.”
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Regulatory Developments

SEC Adopts Rules and Forms for Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

On Aug. 5, the SEC voted to adopt registration rules and forms for security-based swap dealers and major security-based swap participants (collectively, SBS entities). According to the statement of Commissioner Luis A. Aguilar, these rules and forms, first proposed in October 2011 in Release No. 34-65543, are intended to implement Exchange Act Section 15F, added by Title VII of the Dodd-Frank Act, which requires the SEC to adopt rules to provide for the registration of SBS entities. The new rules will: (1) require filing of information about the SBS entity on a registration form, (2) require a senior officer to certify that there are policies and procedures in place to prevent violations of the federal securities laws, and to maintain documentation supporting this certification, (3) require a chief compliance officer to certify that the registrant has determined that none of its associated persons are subject to a statutory disqualification—whether they are natural persons or entities—unless relief is specifically provided by the SEC, and (4) deem an applicant to be conditionally registered as soon as its completed application for registration is submitted. In conjunction with the third point, the SEC proposed a new Rule 194 which would provide a process for the SEC to determine whether it is in the public interest to permit a statutorily disqualified associated person to continue to engage in SBS transactions on behalf of an SBS entity.

SEC Adopts CEO Pay Ratio Rule

At the same meeting on Aug. 5, the SEC voted to adopt changes to rules and forms to implement Section 953(b) of the Dodd-Frank Act requiring a public company to disclose the ratio of the total compensation of its chief executive officer (CEO) to the median total compensation received by the rest of its employees (Release No. 33-9877). The amendments to Item 402 of Regulation S-K and to Form 8-K, were first proposed in September 2013 in Release No. 33-9452. The SEC received in response over 287,000 comment letters, over 1,500 of them individual letters, with the rest being form letters. According to a statement of Commissioner Aguilar, the rule as adopted permits issuers to (1) choose a reasonable method to identify the median employee that is appropriately tailored to their business, including identifying the median employee using statistical sampling or any consistently applied compensation measure (such as payroll records), (2) exclude from the pay ratio calculation a de minimis amount of non-U.S. employees, (3) exempt from the pay ratio calculation non-U.S. employees from certain jurisdictions when foreign privacy laws make it illegal to provide the information necessary to calculate the pay ratio, and (4) calculate the median employee only once every three years, instead of every year, providing certain conditions are met. Dissenting statements were issued by Commissioners Daniel M. Gallagher and Michael S. Piwowar.

FINRA Proposes Rule Regulating Accounts Established by Associated Persons at Other Broker-Dealers and Financial Institutions

On Friday, FINRA filed with the SEC a proposed rule change to adopt FINRA Rule 3210 in the consolidated FINRA rulebook and to delete NASD Rule 3050, Incorporated NYSE Rules 407 and 407A and Incorporated NYSE Rule Interpretations 407/01 and 407/02. The new rule creates monitoring and disclosure obligations which reflect the approach that a member firm is responsible for supervising the trading activities of its associated persons. The rule reflects provisions of the NASD and NYSE rules as well as comments FINRA received in response to an April 2009 Notice.

Client Alert: New Proposed Treasury Regulations Focus on Management Fee Waivers

Goodwin Procter’s Tax practice issued a client alert on new proposed tax regulations that have been issued relating to disguised payments for services between partners and partnerships. The proposed regulations focus primarily on management fee waiver structures in investment funds, but also will impact partnership profits interests in a variety of other contexts. This client alert summarizes the proposed regulations and provides several immediate practical steps for fund sponsors to consider.

Enforcement & Litigation

FINRA Fines Firm and Suspends CEO and Compliance Officers for Sales of Unregistered Penny Stocks and AML Violations

FINRA announced on Aug. 3 that it entered an Order Accepting Offer of Settlement fining Aegis Capital Corp. $950,000 for improperly selling unregistered penny stocks and for related supervisory failures, and for failing to implement anti-money laundering (AML) policies and procedures. In the same Order, Charles D. Smulevitz and Kevin C. McKenna, who served successively as Chief Compliance and AML Compliance Officers at the time of the violations, agreed to 30- and 60-day principal suspensions, and fines of $5,000 and $10,000, respectively, for their supervisory and AML failures. In an Order Accepting Offer of Settlement in a separate proceeding, Robert Eide, Aegis’s President and CEO, was suspended for 15 days and fined $15,000 for failing to disclose more than $640,000 in outstanding liens.

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