SEC Publishes Text of Regulation SBSR; Commissioners Dissent after Discovery of Comment Letter

The SEC released the texts of previously adopted Regulation SBSR, which prescribes the reporting and public dissemination of security-based swap transaction data, and Regulation SDR, which requires security-based swap data repositories (“SDRs”) to register with the SEC. The SEC vote to adopt the rules occurred on January 14, 2015.

The SEC also published the text of the additional proposed rules, rule amendments and guidance related to Regulation SBSR and the reporting and public dissemination of security-based swap transaction data.

According to SEC Commissioners Gallagher and Piwowar (the “Commissioners”), the delay in the publishing of the text of these rules is due to an “extensive comment letter” discovered by the SEC shortly after the vote to adopt the rules. The Commissioners explained that the comment letter covered a range of “key issues,” and was submitted by an organization whose membership will be responsible for reporting nearly all security-based swaps subject to reporting under Regulation SBSR.

The Commissioners said that they asked the SEC to publish the comment letter and reopen the comment period for Regulation SBSR in order to account for the inadvertent internal process failure, and to afford the comment letter the same consideration that had been provided to others. Instead of granting that request, the Commissioners explained, the SEC chose to publish the previously adopted releases, which were modified to include references to the omitted comment letter.

Therefore, the Commissioners stated, they did not support the publication of the modified rulemaking release, “as it glosses over a significant failure of our internal processes.” They also continued to dissent on the substance of Regulation SBSR for the reasons set forth in their original statement.

See: Text of Adopted Regulation SBSR; Text of Regulation SDR; Text of Proposed Rule; Commissioner Gallagher and Piwowar’s Dissent.
Related news: SEC Adopts Rules to Increase Transparency in Security-Based Swaps Market (January 15, 2015).

See also: The Purloined Letter by Edgar Allen Poe.


OCC Deputy Comptroller Discusses Operational Risk and Cyber Threats

Office of the Comptroller of the Currency Deputy Comptroller for Operational Risk Beth Dugan discussed cyber threats, operational risks and the importance of effective risk management in a speech at The Clearing House’s Operational Risk Colloquium.

According to Ms. Dugan, while the impact of cyber threats on financial services firms has been relatively limited to date, the severity of such threats is escalating rapidly as cyber attackers become increasingly sophisticated in exploiting the vulnerabilities of commonly used infrastructures. In particular, Ms. Dugan noted that cyber attackers are increasingly:

  • using targeted emails and other forms of social engineering to compromise systems and credentials;
  • using malware to corrupt legitimate Web sites;
  • encrypting data and mobile devices in order to extort users or organizations to pay ransoms to retrieve such data or to regain access to such devices; and
  • exploiting gaps in operating systems at foreign financial firms to install malware that destroys the operating systems; and
  • broadly sharing tools to identify and exploit infrastructure vulnerabilities.

Ms. Dugan recommended that, to address the growing risk of cyber threats, every financial institution should become a member of the Financial Services Information Sharing and Analysis Center (“FS-ISAC”). Additionally, Ms. Dugan recommended that financial institutions expand hypothetical disruption scenarios to include the impact of cyber threats on third-party service providers, customers and other critical infrastructure components.  Finally, Ms. Dugan stressed the importance of (i) cultivating a “strong risk culture,” which would include routine discussions of cyber threats, as well as (ii) training and awareness programs for employees.

A link to FS-ISAC is available here.

See: Ms. Dugan’s Speech.


Federal Banking Regulators Publish New Formula Tool for Calculating Capital Requirements for Securitization Exposures

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (collectively, the “Regulators”) published a simplified supervisory formula tool to assist institutions in calculating risk-based capital requirements for securitization exposures under the revised capital rules.

According to the Regulators, the tool is neither required nor a component of regulatory reporting.  The Regulators recommended that banks continue to reference the revised capital framework when determining regulatory capital requirements.

See: SSFA Securitization Tool (Excel file); FDIC Press Release; OCC Press Release.


EU States Set Target Launch Date for Financial Transaction Tax

European states involved in the development of a Financial Transaction Tax (“FTT”) agreed to make January 1, 2016 its target launch date.

The FTT is designed to oblige banks to aid in rebuilding Europe’s post-crisis finances. In its initial proposal, the European Commission tried to introduce a tax of 0.1 percent for trading in shares and on bonds, and a 0.01 percent tax on derivatives such as options, futures, and contracts for difference or interest rate swaps when at least one of the parties was based in the EU.

In December 2014, the member states were unable to reach an agreement. However, in late January 2015, France and Austria unblocked negotiations by offering a compromise proposal. Under the compromise, the finance ministers of the member states said, the FTT should have the widest possible base, which would be covered by low rates, while taking into account the economic impact of the potential relocation of financial services.

Austria, Belgium, Estonia, France, Germany, Italy, Portugal, Slovakia, Slovenia and Spain all signed the common text. Of the European States involved in the FTT’s development, the Greek Finance Minister alone refrained from signing.

See: Euractiv Press Release.

SEC Director Higgins Discusses “Directly Conflicts” Exclusion Under Rule 14a-8

SEC Division of Corporation Finance (the “Division”) Director Keith Higgins discussed the his views on the controversy over conflicting proposals between shareholders and management, and how the SEC should respond with regard to the “directly conflicts” exclusion under Exchange Act Rule 14a-8. His remarks were delivered at the Practising Law Institute Program on Corporate Governance.

Although Rule 14a-8 generally requires a company to include a qualified shareholder proposal in its proxy materials, a company may exclude it for one of the 13 reasons described in the rule. According to Mr. Higgins, the most significant recent development in the Division’s shareholder program is the decision on January 16, 2015 that the Division will not express its informal views on any requests for exclusions made by an issuer under Rule 14a-8(i)(9): the so-called “directly conflicts” exclusion. (For an example of an instance in which the Division refused to give comfort on an issuer request, see, e.g., the Whole Foods letter.)

The exclusion itself, which allows a company to exclude a shareholder proposal that “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting,” has been the source of recent conflicting views.

Mr. Higgins explained various concerns with the motives of management proposals; for example, the possibility that the only reason for a proposal by management in response to a shareholders’ proposal might be to prevent the shareholders from expressing their views; or, if management came up with slightly different proposals year after year, the probability that the purpose would be to keep a shareholders’ proposal from making it into the proxy materials. According to Mr. Higgins, it is difficult for the Division to assess “good faith” motives.

Mr. Higgins added that, as the Division continues to review Rule 14a-8(i)(9), it may consider whether there is a structural limitation in the SEC’s overall current proxy rules that makes side-by-side comparisons difficult.

Mr. Higgins requested that interested parties send comments on this topic to

See: Mr. Higgins’ Speech.
Related news: SEC Chair White Directs Staff to Review Rule for Excluding Conflicting Proxy Proposals (January 20, 2015).


FRB Governor Powell Speaks Against Proposals to Limit Fed’s Independence

Board of Governors of the Federal Reserve System (“FRB”) Governor Jerome Powell spoke out against “misguided” proposals to place limits on the Federal Reserve’s (the “Fed’s”) ability to respond to financial crises. He delivered his remarks at the Catholic University of America.

In particular, Governor Powell criticized three types of “misguided” proposals – namely, to:

  • “audit the Fed” (i.e., subject the Fed’s conduct of monetary policy to congressional auditing);
  • require the Fed to adopt and follow specific equations for setting monetary policy, and to face immediate congressional hearings and investigation by the Government Accountability Office whenever it deviates from such policies; and
  • restrict the Fed’s discretion in providing liquidity facilities during financial crises.

Governor Powell argued that such criticisms of the Fed are misleading, since the Fed is “open and transparent” in its operations and “extensive and effective” in its implementation of monetary policy as determined by Congress. Governor Powell also argued that the costs of restricting the Fed’s independence would outweigh any corresponding benefits, given the substantial positive effects of the Fed’s control of monetary policy on the U.S. economy as a whole.

See: Governor Powell’s Speech.


SEC Proposes Rules for Hedging Disclosure

The SEC proposed rules to enhance the corporate disclosure of company hedging policies for directors and employees. The proposal requires an issuer to disclose whether it permits directors and employees to hedge their exposure to the company’s securities that they own or that are granted to them as compensation.

The proposal amends Regulation S-K to require annual proxy disclosures about whether directors and employees are permitted to hedge or offset any decrease in the market value of equity securities granted by a company as compensation or otherwise held by them, as well as the equity securities of their employer’s parent, any subsidiary or any affiliate of the company that is registered under Exchange Act Section 12. The disclosures apply to companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies and registered closed-end investment companies with shares listed and registered on a national securities exchange.

SEC Commissioners Gallagher and Piwowar (the “Commissioners”) issued a statement that offered their qualified support for the proposed rule, but also identified several aspects of the proposal that they found “troubling.” The Commissioners questioned whether costs of the proposed requirement could fall disproportionately on emerging growth companies and smaller reporting companies, since they are less able to bear the fixed costs of disclosure financially than larger established companies. The Commissioners also explained that certain externally managed investment companies have few employees who are compensated by hedging and would be subject to the proposal.

Furthermore, the Commissioners stated, the SEC should have exempted disclosures from the rule that relate to employees who cannot affect the company’s share price. According to the Commissioners, the scope of securities of the issuer and the issuer’s affiliates – including subsidiaries, parents, and brother-sister companies – is “overbroad.”

By failing to address certain exceptions and exemptions from the proposed rule, the Commissioners stated, the SEC runs the risk of “disclosure overload.” The Commissioners questioned whether prioritizing the release “over the Division of Corporation Finance’s comprehensive disclosure review was the highest and best use of that Division’s expert staff.”

Lofchie Comment: Congressional legislation requires the SEC, as well as the CFTC, to adopt too many rules within wholly impractical timeframes. Thus, the SEC is effectively given the authority (even if that authority is not provided by legislation) to determine which Congressional directives should be prioritized. Should legislation be implemented on a first-in, first-out basis or in response to political pressures (the directives of the Congressional majority), or should rules that seem more sensible to the SEC as a matter of policy be implemented first? It seems reasonable that the SEC clarify the policy and communicate the order in which laws will be subject to rulemaking. Perhaps more important than the Commissioners’ specific comments is the question of whether the development of this proposed rule was a good use of the SEC’s resources.

See: Text of Proposed Rule.
See also: SEC Commissioners Gallagher and Piwowar’s Statement; Commissioner Aguilar’s Statement.


Does math support euro survival?

CFS asked the question “Does math support euro survival?” on December 5, 2011.

Based on a quantitative approach to evaluate the relative competitiveness of nations, our view was “yes” – the euro can and should survive.

However, Greece and Portugal remain serious outliers. Their implicit currencies require serious economic adjustment or issuance of a new drachma and escudo.

Euro Components: CFS Synthetic Currency Valuations

CFS synthetically developed real effective currencies for eleven major nations within the euro. Real exchange rate movements and currency valuations for individual euro nations help answer three fundamental questions.

– Did member nation exchange rates enter the euro at an appropriate level?
– Since entry into the euro, did the unified rate hinder or help international competitiveness and growth?
– To what extent are euro members threatened by relatively overvalued currencies – or near levels consistent with currency crises in emerging market economies?

For the full report:

ESMA Issues Feedback Statement on Central Clearing of Non-Deliverable Forwards

The European Securities and Markets Authority (“ESMA”) published a statement regarding its consultation paper on the clearing obligation for non-deliverable foreign exchange forwards (“NDFs”).

The European Markets Infrastructure Regulation requires ESMA to draft technical standards for the clearing obligations of different derivative classes. The statement summarizes the feedback received in response to the consultation paper.

Based on the feedback that it received, ESMA stated, it is not proposing a clearing obligation on the NDF classes at this stage. ESMA explained that more time is needed to address appropriately the main concerns raised during the consultation.

See: ESMA Feedback Statement.


IOSCO Announces Project Analyzing Credit Rating Agencies

IOSCO approved a project by its Committee 6 on Credit Rating Agencies (“C6”) to gain a better understanding of credit rating agencies (“CRA”) and other CRA products and services.

The project will consist of two parts. C6 will undertake (i) a series of information-gathering exercises, which include surveying the issuers of CRA products and services, and (ii) the gathering of information on how CRA issuers, investors and users understand and utilize CRA products.

See: Press Release; C6 CRA Survey.