Financial Services Weekly News - September 2015 #5


Regulatory Developments

SEC Proposes to Amend Administrative Proceedings Rules

On Sept. 24 the SEC announced that it had voted to propose amendments to rules governing its administrative proceedings. The proposals, in Release No. 34-75977, include three primary changes to the Commission’s Rules of Practice that: (1) adjust the timing of administrative proceedings, including by extending the time before a hearing occurs in appropriate cases, (2) permit parties to take depositions of witnesses as part of discovery and (3) require parties in administrative proceedings to submit filings and serve each other electronically, and to redact certain sensitive personal information from those filings. The SEC will seek public comment on the proposal for 60 days after publication in the Federal Register.

SEC Requests Comment on Regulation S-X

On Sept. 25 the SEC announced that it had issued Release No. 33-9929 requesting comment on the effectiveness of financial disclosure requirements in Regulation S-X. The request for comment focuses on the requirements for the form and content of financial disclosures that companies must file with the Commission about acquired businesses, affiliated entities, and guarantors and issuers of guaranteed securities, and is part of the SEC’s Disclosure Effectiveness Initiative, a broad-based staff review of the disclosure requirements and the presentation and delivery of the disclosures. The public comment period will remain open for 60 days following publication in the Federal Register.

FINRA Proposes to Amend Margin Rule to Include To Be Announced Transactions

On Sept. 24 FINRA filed with the SEC a proposed amendment to FINRA Rule 4210 (Margin Requirements) to establish margin requirements for (1) To Be Announced (TBA) transactions, inclusive of adjustable rate mortgage (ARM) transactions, (2) Specified Pool Transactions, and (3) transactions in Collateralized Mortgage Obligations (CMOs), issued in conformity with a program of an agency or Government-Sponsored Enterprise, with forward settlement dates, as further defined in the proposed amendment. A TBA transaction is defined in FINRA Rule 6710(u) to mean a transaction in an Agency Pass-Through Mortgage-Backed Security or a Small Business Administration-Backed Asset-Backed Security where the parties agree that the seller will deliver to the buyer a pool or pools of a specified face amount and meeting certain other criteria but the specific pool or pools to be delivered at settlement is not specified at the Time of Execution, and includes TBA transactions for good delivery and TBA transactions not for good delivery. According to FINRA, the TBA market is one of the few markets where a significant portion of activity is unmargined, thereby creating a potential risk arising from counterparty exposure. This amendment was originally proposed in Regulatory Notice 14-02. The proposal has not yet been published for comment by the SEC.

MSRB Seeking Comment on Proposal to Require Municipal Securities Dealers to Disclose Mark-Up of Riskless Principal and Other Principal Transactions

On Sept. 24 the MSRB announced that it had issued Regulatory Notice 2015-16 requesting comment on draft rule amendments to require disclosure of mark-ups for specified principal transactions with retail customers, including riskless principal transactions. According to the Notice, the change to require disclosure of mark-ups for riskless principal and other principal transactions had been called for in public statements by SEC Chair Mary Jo White and each of the other Commissioners. The comment period ends on Nov. 10, 2015.

Enforcement & Litigation

CFTC Settles with Bitcoin Swap Execution Facility for Wash Trade Violation

On Sept. 24 the CFTC announced that it had entered into an order settling charges against TeraExchange LLC (Tera), a provisionally registered Swap Execution Facility (SEF), for failing to enforce its prohibition on wash trading and prearranged trading on the SEF platform. According to the CFTC, Tera brought together two market participants and arranged for them to enter into the transactions, telling one that the trade would be “to test the pipes by doing a round-trip trade with the same price in, same price out.” Subsequent to the transactions, Tera issued a press release and made statements at a meeting of the CFTC’s Global Markets Advisory Committee (GMAC) announcing the transactions, creating the impression of actual trading interest in the Bitcoin swap. Neither Tera’s press release nor the statements at the GMAC meeting indicated that the Oct. 8 transactions were pre-arranged wash sales executed for the purpose of testing Tera’s systems. The CFTC Order requires Tera to cease and desist from future violations relating to its obligations to enforce rules on trade practices. Commissioner Sharon Bowen issued a dissent stating that she believed there should have been a penalty beyond the cease and desist order for creating fictitious trades.

New ERISA Litigation Update Available

Goodwin Procter’s ERISA Litigation Practice published its latest quarterly ERISA Litigation Update. The update discusses (1) the Fifth Circuit affirming dismissal of claims involving de-risking of pension assets; (2) a federal court’s denial of class certification in an excessive fee case against a service provider; and (3) a federal court trial decision addressing measure of damages in an ERISA breach of fiduciary duty case.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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