SEC Issues Order Modifying and Extending the Pilot Period for the National Market System Plan to Address Extraordinary Market Volatility

On April 21, 2016, the Securities and Exchange Commission issued an order extending the pilot period of the National Market System Plan to Address Extraordinary Market Volatility, otherwise known as the limit-up-limit down (“LULD”) plan.

In issuing this order, the Securities and Exchange Commission also modified the LULD plan with respect to the reference price for securities that do not trade in the opening auction on the primary listing exchange. The modified plan now provides that in these circumstances a security’s reference price will be the previous trading day’s closing price or, if no closing price exists, the last reported sale on the primary listing exchange.

The pilot period will expire on April 21, 2017. Release.

SEC’s Division of Investment Management Issues Letter Regarding Independent Verification Required by Rule 206(4)-2 Under the Advisers Act

On April 25, 2016, the Staff of the Division of Investment Management of the Securities and Exchange Commission issued a no-action letter that provides that it would not recommend enforcement action to the Commission under Section 206(4) of, and Rule 206(4)-2 under, the Investment Advisers Act of 1940 if an investment adviser does not obtain a surprise examination by an independent public accountant (as is generally required) where it acts as a sub-adviser in an investment advisory program for which a “related person” “qualified custodian” is the primary adviser (or an affiliate of the primary adviser), and the primary adviser is responsible for complying with Rule 206(4)-2.  A “related person” of another generally is a person who is directly or indirectly controlling or controlled by the other person or under common control with such person.  A “qualified custodian” is a bank, a registered broker-dealer, a registered futures commission merchant and certain foreign financial institutions.”

The Staff’s position was based, in particular, on the following:

  1. the sole basis for the sub-adviser having custody is its affiliation with the qualified custodian and the primary adviser;
  2. the primary adviser will comply with Rule 206(4)-2 (including by having client funds and securities in the investment advisory program verified by a surprise examination conducted by an independent public accountant registered with the Public Company Accounting Oversight Board (“PCAOB”) pursuant to an agreement entered into by the primary adviser);
  3. the sub-adviser does not: (i) hold client funds or securities itself; (ii) have authority to obtain possession of clients’ funds or securities; or (iii) have authority to deduct fees from clients’ accounts; and
  4. the sub-adviser will continue to be required to obtain from the primary adviser or qualified custodian annually a written internal control report prepared by an independent public accountant registered with and subject to regular inspection by the PCAOB as required by Rule 206(4)-2(a)(6).

Covered Broker-Dealer Provisions Under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act

On February 17, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation “jointly propos[ed] a rule to implement provisions applicable to the orderly liquidation of covered brokers and dealers under Title II of the Dodd-Frank Act[.]”  The two government agencies issued the proposed rule pursuant to the Dodd-Frank Act, which specifically empowers them to regulate the liquidation of specific large financial entities.  Release.

The SEC Adopts Cross-Border Security-Based Swap Rules

On February 10, the Securities and Exchange Commission (the “SEC”) adopted rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act to regulate both U.S. and foreign dealers who engage in security-based swap dealing activities in the U.S. The rules require non-U.S. companies to include certain transactions in their determinations of whether such companies are subject to registration as security-based swap dealers. The final rules will take effect 60 days after publication in the Federal Register, but compliance is not required until 1 year after the publication or the SBS Entity Counting Date, whichever comes later. Press release.

SEC Approves Interim Final Rules Implementing Two Provisions of the FAST Act

On January 13, the Securities and Exchange Commission announced that it approved interim final rules implementing two provisions of the Fixing America’s Surface Transportation (FAST) Act, adopted by Congress in December, that revise financial reporting forms for emerging growth companies and smaller reporting companies.

The Congressionally mandated rules revise Forms S-1 and F-1 to provide that as long as emerging growth companies’ registration statements include all required financial information at the time of the offering, they will be allowed to omit certain historical period financial information prior to the offering.  In addition, the rules revise Form S-1 to allow smaller reporting companies to use incorporation by reference for future filings the companies make under the federal securities laws after the registration statement becomes effective.

The interim final rules also include a request for comment on whether the rules should be expanded to include other registrants or forms.

The rules will become effective when published in the Federal Register and the public comment period will remain open for 30 days following their publication.

SEC Announces 2016 Examination Priorities

On January 11, the SEC announced its Office of Compliance Inspections and Examinations’ (OCIE) 2016 priorities.  New areas of focus include liquidity controls, public pension advisers, product promotion, and two popular investment products – exchange-traded funds and variable annuities.  The priorities also reflect a continuing focus on protecting investors in ongoing risk areas such as cybersecurity, microcap fraud, fee selection, and reverse churning.

The 2016 examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges.  Areas of examination include:

  • Retail Investors –  OCIE will continue several 2015 initiatives to assess risks to retail investors seeking information, advice, products, and services to help them plan for and live in retirement. It also will undertake examinations to review exchange-traded funds (ETFs) and ETF trading practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds.
  • Market-Wide Risks –  OCIE will continue its focus on cybersecurity controls at broker-dealers and investment advisers.  New initiatives for 2016 include an evaluation of broker-dealers’ and investment advisers’ liquidity risk management practices, and firms’ compliance with the SEC’s Regulation SCI, designed to strengthen the technology infrastructure of the U.S. securities markets.
  • Data Analytics – OCIE’s enhanced ability to analyze large amounts of data will assist examiners’ ongoing initiatives to assess anti-money laundering compliance, detect microcap fraud, and review for excessive trading.  Data analytics also will help examinations focused on promotion of new, complex, and high-risk products.

The published priorities for 2016 are not exhaustive and may be adjusted in light of market conditions, industry developments and ongoing risk assessment activities.

SEC Reopens Comment Period for Proposed Amendments to Rule 13n-4 under the Securities Exchange Act of 1934

On January 15, the Securities and Exchange Commission reopened the comment period for proposed amendments to rule 13n-4 through a release entitled “Access to Data Obtained by Security-Based Swap Data Repositories and Exemption from Indemnification Requirement[.]”  The SEC reopened the comment period due to the recent passing of the Surface Transportation Reauthorization and Reform Act of 2015, which contained provisions that affected the language in the prior proposal.  Release.

SEC Adopts Rule for Pay Ratio Disclosure

On August 5, the SEC adopted a final rule that requires a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees. The new rule was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and provides companies with flexibility in calculating this pay ratio.  ReleaseFinal Rule.

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

On August 5, the SEC proposed new rules to provide a comprehensive, efficient process for security-based swap dealers and major security-based swap participants to register with the SEC.  The new rules address all aspects of the registration regime for security-based swap dealers and major security-based swap participants, setting forth the extensive set of information required to be provided and kept up to date by a registrant.  Comments must be received on or before 60 days after publication in the Federal Register.  ReleaseProposed Rule.

Summary of Crescent No-Action Letter

On July 17, 2015, the SEC published a no-action letter addressing the effect on the sponsor’s credit risk retention requirement of the refinancing of one or more tranches of existing CLO debt, an issue which has been of considerable interest to the CLO sector as it directly affects the utility of the refinancing option in transactions done before the adoption of the credit risk retention rules.  In response to a request submitted by Crescent Capital Group LP, the SEC indicated that under the terms and conditions described in the request, such a refinancing of collateralized loan obligations priced prior to the December 24, 2014 publication of the final credit risk retention rules would not trigger the application of the credit risk retention requirement to the CLO.  In order to be entitled to such treatment, among other things, (i) the refinancing must be completed within four years of the original closing date, (ii) the interest rate of the refinancing notes must be lower than the rate of the refinanced notes, (iii) other than the reduction in rates, the capital structure must remain unchanged and the principal amount, priority of payment, voting and consent rights and stated maturity of the refinancing notes must be the same as the refinanced notes, (iv) the investment criteria applicable to the CLO must remain unchanged, (v) the proceeds from the refinancing must be applied to repay the refinanced notes (and not applied as a means to acquire other assets), (vi) no additional subordinate interests may be issued in connection with the refinancing nor may the identities of the subordinated interest holders be changed as a result of the refinancing and (vii) while refinancing of different classes of notes may occur on different dates, each class may be refinanced only once.  In addition, the offering document for the refinancing notes must prominently state, among other things, that the sponsor is not retaining a risk retention interest in connection with the refinancing.  The no-action request and the SEC’s response are available through this link.