Financial Institution Regulatory

SEC Office of Compliance Inspections and Examinations Issues Risk Alert on Whistleblower Rule Compliance

 

On October 24, Staff in the Office of Compliance Inspections and Examinations (the “Staff”) issued a National Exam Program Risk Alert announcing that it is examining registered investment advisers and registered broker-dealers compliance with key whistleblower provisions arising out of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Commission recently has brought several enforcement actions charging violations of Rule 21F-17 of the Commission’s whistleblower regulations.

 

The Staff now is routinely reviewing, among other things, compliance manuals, codes of ethics, employment agreements, and severance agreements to determine whether provisions in those documents pertaining to confidentiality of information and reporting of possible securities law violations may raise concerns under Rule 21F-17.
Section 21F of the Securities Exchange Act of 1934 was added by the Dodd-Frank Act.  To implement Section 21F, among other things, the Commission adopted Rule 21F-173 thereunder which provides that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

 

The Staff highlighted that “Recent enforcement actions have identified certain provisions of confidentiality or other agreements required by employers as contributing to violations of Rule 21F-17 because they contained language that, by itself or under the circumstances in which the agreements were used, impeded employees and former employees from communicating with the Commission concerning possible securities law violations. This potential chilling effect can be especially pronounced when such documents (e.g., severance agreements) provide that an employee may forfeit all benefits if he or she violates any terms of the agreement.” Alert.

The OCC Proposes Rule to Address Concerns Relating to Exercise of Default Rights Under Qualified Financial Contracts

 

On October 3, 2016, the Office of the Comptroller of the Currency proposed a rule to enhance the resilience of federally chartered and licensed financial institutions. The proposed rule addresses concerns relating to the exercise of default rights under certain financial contracts that could interfere with the orderly resolution of systemically important financial firms. The rule requires, among other things, covered banks to ensure that covered qualified financial contracts (i) limit the exercise of default rights based on the insolvency of an affiliate of a covered bank and (ii) contain contractual stay-and-transfer provisions analogous to the statutory stay-and-transfer provision set forth under title II of the Dodd-Frank Act and the Federal Deposit Insurance Act. Comments on the proposed rule are due on October 18, 2016. Press Release.

The OCC Publishes Final Guidelines on Recovery Planning

 

On September 29, 2016, the Office of the Comptroller of the Currency (the “OCC”) published final guidelines establishing enforceable standards for recovery planning. The final guidelines generally apply to banks with average total consolidated assets of $50 billion or more (“covered banks”). If a covered bank fails to meet a guideline, the OCC may require such bank to submit a plan specifying steps the bank would take to comply with the guideline. If, after being notified that it is in violation of a guideline, a covered bank fails to submit an acceptable compliance plan or fails to materially comply with a plan approved by the OCC, the OCC may issue an order enforceable under section 8 of the Federal Deposit Insurance Act. Press Release. Final Guidelines.

ECB Amends Eligibility Criteria for Unsecured Bank Bonds

 

On October 5, 2016, the European Central Bank (“ECB”) stated that it will be making changes to its collateral framework by revising the collateral eligibility criteria and risk control measures in relation to senior unsecured debt instruments issued by credit institutions or investment firms (unsecured bank bonds or UBBs).

Under the current rules, UBBs will, except for these new changes, become ineligible on January 1, 2017. The ECB’s revisions to its collateral framework are aimed at temporarily maintaining the eligibility of UBBs (including the eligibility of statutorily subordinated UBBs that are not also contractually subordinated), beyond January 1, 2017.

Furthermore, UBBs will also be subject to additional risk control measures to remain eligible. The ECB has decided to reduce, as of January 1, 2017, the usage limit for uncovered bank bonds from 5% to 2.5%. The reduction will not apply where:

  • the value of such assets is equal to or less than €50 million (net of any applicable haircut); or
  • such assets are guaranteed (by a public sector entity that has the right to levy taxes) by way of a guarantee that complies with the provisions of Article 114 of the ECB Guideline on the implementation of the Eurosystem monetary policy framework.

The changes are expected to come into effect from January 1, 2017.

FINRA and SEC Announce Tick Size Pilot Program

 

On October 3, 2016, the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”)’s Office of Investor Education and Advocacy issued an Investor Alert announcing a new National Market System (NMS) Plan that will implement a Tick Size Pilot Program (the “Pilot”) that will widen the minimum quoting and trading increment – sometimes called the “tick size” – for some small capitalization stocks. The goal of the Pilot is to study the effect of tick size on liquidity and trading of small capitalization stocks.

The Pilot has been implemented pursuant to the Jumpstart Our Business Startups Act which, among other things, directed the SEC to conduct a study and report to Congress on how decimalization affected the number of initial public offerings, and the liquidity and trading of securities of smaller capitalization companies.

Under the Pilot, the tick size will be widened from a penny ($0.01) to a nickel ($0.05) for specified securities listed on national securities exchanges (“Pilot Securities”). For some Pilot Securities, only quoting will need to occur in $0.05 increments, while for others, both quoting and trading generally will need to occur in increments of a nickel.

The Pilot will include a specified subset of the exchange-listed stocks of companies that have $3 billion or less in market capitalization, an average daily trading volume of one million shares or less and a volume-weighted average price of at least $2.00 for every trading day. There will be a control group of approximately 1,400 securities and three test groups, each with approximately 400 securities selected by a stratified sampling.

The Plot will run for a two-year period that will commence on October 3, 2016.

The data collected from the Pilot will be used by the SEC, national securities exchanges and FINRA to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors—such as less volatility and increased liquidity.

Resources:

CFTC Signs Memorandum of Understanding with Two Mexican Authorities to Enhance Supervision of Cross-Border Regulated Entities

 

On September 6, 2016, the U.S. Commodity Futures Trading Commission announced that it “signed a Memorandum of Understanding (MOU) with the Comisión Nacional Bancaria y de Valores (CNBV) and the Banco de México (BDM) regarding cooperation and the exchange of information in the supervision and oversight of certain regulated entities that operate on a cross-border basis in the United States and in Mexico.” Press release.

CFTC Seeks Public Comment on Proposed Whistleblower Rule Amendments

 

On September 1, 2016, the U.S. Commodity Futures Trading Commission (“CFTC”) announced that it is “requesting public comment on proposed amendments to the Whistleblower Rules found in Part 165 of the CFTC’s regulations.” The amendments would, among other things, “enhance the process for reviewing whistleblower claims and make related changes to clarify staff authority to administer the whistleblower program.” Comments are due on or before September 29, 2016. Press release.

Agencies Publish Study on Banking Activities and Investments under Dodd-Frank

 

On September 8, 2016, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) released a report detailing activities and investments that banking entities may engage in under state and federal law.

Pursuant to section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which requires the trio of federal banking agencies to conduct the study and report their findings to Congress, the report considers financial, operational, managerial and reputational risks associated with the permissible activities or investments and how banking entities work to mitigate those risks.

Each agency also offers specific recommendations regarding whether an activity or investment could harm the overall safety and soundness of the banking entity or broader financial system and any additional restrictions necessary to curb any such potential risks. Press release. Report.

European Commission Implementing Regulation Establishing a List of Critical Benchmarks Used in Financial Markets under Benchmarks Regulation in OJ

 

On August 12, 2016, the European Commission Implementing Regulation (EU) 2016/1368 establishing a list of critical benchmarks used in financial markets pursuant to the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (2016/1011/EU) (Benchmarks Regulation), was published in the Official Journal of the EU (OJ).

The Regulation highlights that benchmarks play an important role in the determination of the price of many financial instruments and financial contracts and of the measurement of performance for many investment funds. In order to fulfill their economic role, benchmarks need to be representative of the underlying market or economic reality they reflect. Should a benchmark no longer be representative of an underlying market, such as interbank offered rates, there is a risk of negative effects on, inter alia, market integrity, the financing of households (loans and mortgages) and businesses in the Union.

The Implementing Regulation, which specifies the Euro Interbank Offered Rate (EURIBOR) as a critical benchmark, enters into force on the day following its publication in the OJ (that is, August 13, 2016). It will apply from January 1, 2018.

European Commission Adopts Implementing Regulation on Information for Calculation of Technical Provisions and Basic Own Funds for Q3 2016 Reporting under Solvency II

 

On August 8, 2016, the European Commission adopted an Implementing Regulation laying down information for the calculation of technical provisions and basic own funds for reporting with reference dates from June 30 until September 29, 2016 (that is, the third quarter of 2016) in accordance with the Solvency II Directive (2009/138/EC).

In the Regulation, technical information on relevant risk-free interest rate term structures, fundamental spreads for the calculation of the matching adjustment and volatility adjustments are formulated for every reference date, in order to guarantee uniform conditions for the calculation of technical provisions and basic own funds by insurance and reinsurance undertakings for the purposes of Solvency II.

The technical information to be used by insurance and reinsurance undertakings when calculating technical provisions and basic own funds for reporting with reference dates from June 30 until September 29, 2016 are detailed in the annexes to the Implementing Regulation, as follows:

  • Annex 1: the relevant risk-free rate term structures
  • Annex 2: the fundamental spreads for the calculation of the matching adjustment
  • Annex 3: the volatility adjustments for each relevant national market

The Regulation will enter into force the day after it has been published in the Official Journal of the EU (OJ). It will apply from June 30, 2016.