As we make our annual prognostications, there is less visibility than in years past regarding many regulatory and enforcement matters. The majority of the regulations required by the Dodd-Frank Act have been adopted, and the Basel III framework has come together. Below, we offer some thoughts.

The SEC and Fiduciary Duties

Fiduciary duty—perhaps one of the most anticipated issues remains for the SEC to propose a heightened standard for broker-dealers akin to a fiduciary duty. The SEC was required by the Dodd-Frank Act to undertake a study regarding an enhanced duty for broker-dealers. Following completion of this study, the SEC requested quantitative information regarding the effect of the imposition of a heightened duty. More recently, Chair White has noted that addressing rulemaking in this area is a high priority.

Department of Labor Fiduciary Regulations

Market participants remain concerned that the Department of Labor (“DOL”) proposed fiduciary regulations will move forward. The most likely impacted lines of business under the proposed DOL regulations will be IRAs, and plans that have (i) fewer than 100 participants and (ii) investment managers with less than $100 million in assets under management. For those entities, the broker-dealer will most likely need to comply with the “Best Interest Contract Exemption” (“BICE”), which will require, among other things, that the broker contractually (i) acknowledge that it is a fiduciary, (ii) that it will comply with the ERISA prudence standards and otherwise act in the best interest of the plan, and will consider the investment objectives, risk tolerance and financial circumstances of the plan, (iii) that it will disclose conflicts of interest, (iv) that compensation to the broker is reasonable, (v) that it will comply with federal and state laws regarding the rendering of investment advice, etc. (entities never previously had to worry about state laws under ERISA), that it will disclose to DOL that this exemption is being used, and (vii) that the contract not have any provision exculpating the broker dealer or requiring disputes to be submitted to arbitration or limiting the availability of class actions. For non-IRAs or plans having 100 or more participants or investment advisers who manage $100 million or more in assets, brokers acting as fiduciaries under the DOL’s expanded definition will most likely need to meet a subset of the BICE rules called the “impartial conduct” requirements, which are basically subsumed by (ii), (iii), and (iv) above.

Both the DOL standard (and likely the SEC standard) will affect brokers that sell proprietary products and illiquid-products. Similarly, the standard will have a greater impact on transactions in which the       broker-dealer acts as a principal, compared to transactions in which the broker-dealer acts as an agent.

Accredited Investor Definition

The SEC was required by the Dodd-Frank Act to conduct regular review of the appropriateness of the definition. SEC representatives have said that the study is nearing completion.

Federal Reserve Rules for G-SIBs

Final Federal Reserve Board's (“Fed”) rules for G-SIBs relating to long-term debt (“LTD”), total loss absorbing capacity (“TLAC”) and the maintenance of a clean holding company —the comment period relating to the proposed rules closes in February 2016. As we have previously reported, we anticipate that the final rules will be released mid-year 2016. U.S. G- SIBs and foreign G-SIBs subject to a U.S. intermediate holding company requirement are assessing the impact of the proposed rules and studying whether future issuances of structured products will be below the specified permissible capped amount or require the creation of a finance subsidiary.

Financial Stability Board’s (“FSB”) Final TLAC Principles

As previously reported, the FSB Principles also affect structured note issuances for non-U.S. G-SIBs. Although each national regulator will need to formulate regulations to implement the FSB Principles for their G-SIBs, we anticipate that this process will be completed in 2016. We anticipate that other jurisdictions, such as, for example, Canada, will adopt regulations that are similar to the FSB Principles for their own domestic systemically important banks (D-SIBs).

Overall Impact on Structured Notes Market

As we have previously discussed, European banks (G-SIBs and non-G-SIBs) will be subject to a bail-in regime and structured notes are subject to bail in. The effect of bail-in, the Fed's LTD, TLAC, and clean holding company requirement, and the FSB Principles on the debt markets and especially on the structured products market will be significant. We anticipate that 2016 will be marked by disruption and transition.

Intermediate Holding Companies

Certain foreign banks doing business in the United States, including some frequent structured notes issuers, are required to comply by 2017 with an intermediate holding company requirement. Formation of the IHC, and capitalizing and funding the IHC, will require significant resources.

Regulation of the Use Derivatives by Funds

As discussed elsewhere in this issue, the SEC recently proposed regulations that would limit the use of derivatives by certain funds, including certain ETFs. These regulations may indirectly affect products that reference ETFs.

Conflicts Rule

Section 621 of the Dodd Frank Act requires that the SEC implement final rules prohibiting a broker-dealer from entering into certain hedging arrangements in connection with asset-backed securities transactions, which arrangements would result in a conflict of interest between the broker-dealer and investors in the ABS transactions. Final rules have not been adopted. Depending upon the definition of "asset-backed security," certain credit-linked notes may be impacted.

Securities-based Swaps Regulations

The regulations related to securities-based swaps will not become effective until at least 2017. However, market participants will need to begin their compliance planning in 2016. The SEC has not released final rules relating to certain securities-based swaps matters.

Margin

Swap market participants other than commercial end users will devote significant resources next year to compliance with the prudential regulators' and CFTC's rules requiring margin for uncleared swaps. Those rules, which are scheduled to be phased into effect starting in September of next year, upend longstanding practices in the swaps market by, among other things, requiring many market participants to post initial margin, similar to typical practice in the futures market. ISDA has started the process of determining the extent to which it may be able to facilitate compliance by means of one or more margin-related protocols.

Debt Research Rules

In February 2016, FINRA's final rules relating to debt research will become effective. To the extent that market participants produce research on certain debt indices that may be reference assets, compliance with the debt research rules will be required.

SEC ETP Review

Commenters responded to a request from the Division of Trading & Markets earlier this year for information regarding exchange-traded products, including ETNs. The commenters focused principally on ETFs. It will be interesting to see whether the request and comments results in any policy or rule changes.

FINRA Rules

FINRA representatives have commented that amendments to the communication rules will be released in 2016. We also expect that FINRA will continue to focus on the adequacy of member firm policies addressing potential and mitigating actual conflicts of interest.