Financial Services Update, Vol. 12, Issue 15

Insights from Winston & Strawn

Is Glass-Steagall coming back?

Bloomberg reported on Wednesday, April 5, that White House National Economic Council Director Gary Cohn said in a private meeting with lawmakers that he favored the separation of investment and commercial banks, as was the case before the 1999 repeal of the Glass-Steagall Act. According to the article, Mr. Cohn is not the only person in the Trump administration who supports this position. Treasury Secretary Steven Mnuchin has also expressed support for some version of the Act.

Senator Elizabeth Warren (D-Mass.), one of Wall Street’s most vocal critics, agreed. On Thursday, April 6, she, together with senators John McCain (R-Ariz.), Maria Cantwell (D-Wash.), and Angus King (I-Maine), re-introduced the “21st Century Glass Steagall Act,” which was first introduced in 2013. Senator Warren said in a statement that the bill “would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities,” and would “make ‘Too Big to Fail’ institutions smaller and safer, minimizing the likelihood of a government bailout.”

It is unclear if Elizabeth Warren’s vision of the future of banking coincides with that of the Trump administration or if Congress will sign off on a new Glass-Steagall Act, but, if implemented, the Act could have a significant effect on banking institutions.

John P. Alexander

Feature: Anti-Money Laundering Developments 

Adding to the chorus of voices calling for the Trump administration to ease financial regulations, The Clearing House, an industry group representing large banks, published a report at the end of February that recommends an overhaul of the arduous anti-money laundering/countering the financing of terrorism (“AML/CFT”) framework that applies to financial institutions. The group maintained that under the current framework, which they argue is outdated, financial institutions are “effectively deputized to prevent, identify, investigate, and report criminal activity,” but law enforcement has little influence in how banks allocate their AML/CFT resources.

The Clearing House report recommends reducing the number of suspicious activity reports (“SAR”) that banks file, which has risen sharply in recent years due to banks’ concerns about incurring large penalties for failing to comply with SAR requirements. Under the proposal, banks would not file an SAR for every instance of suspicious activity they detect, but only under circumstances determined in advance by the priorities identified by law enforcement. The report also recommends restoring the Financial Crimes Enforcement Network (“FinCEN”) as the primary agency in charge of banks’ compliance with AML/CFT requirements and increasing FinCEN’s capability to perform enforcement and supervision. The report also advocates for a new federal law that would require companies to disclose their beneficial owners at the time of incorporation. This proposal, long favored by law enforcement and intelligence communities, has met resistance by individual states that receive significant revenue from “shell company” incorporation.

While the climate in Washington D.C. is currently favorable for financial regulation reform, AML/CFT regulation is one area where the Trump administration may be reluctant to scale back requirements. While the president has already initiated review of financial regulation under the Dodd-Frank Act as well as the Department of Labor’s fiduciary rule, the fate of a rule proposed by FinCEN that would require financial advisors registered with the Securities and Exchange Commission (“SEC”) to comply with AML requirements is still under development, according to a report by CNBC. According to an article in Reuters, Rudy Giuliani speculated at a recent compliance conference that the Trump administration would be unlikely to loosen AML/CFT regulations, given the administration’s emphasis on combatting terrorism. Even if the Trump administration changes course and decides to ease federal AML/CFT requirements, banks would still face compliance burdens under state-level regulations, including stricter requirements imposed by the New York Department of Financial Services.

In the meantime, banks continue to look for ways to cut their significant AML/CFT compliance costs. Bloomberg reported that financial institutions are starting to reduce staff in their compliance departments for the first time since the 2008 financial crisis as they rely more on cost-effective technology to perform monitoring functions. In a two-part series (see part 1 and part 2), Forbes examined how a relationship-based approach to identifying AML parties used in conjunction with a financial institution’s transaction monitoring system, which focuses on individual transactions, can reduce the costs associated with investigating false positives by consolidating related transactions.

Banking Agency Developments

OCC

Comptroller Voices Support for Minority Depository Institutions

On April 5th, Comptroller of the Currency Thomas J. Curry discussed the Office of the Comptroller of the Currency’s (“OCC”) support for minority depository institutions and community development financial institutions during remarks at the 2017 Interagency Minority Depository Institutions and Community Development Financial Institutions Conference.

OCC Hosts Risk Governance and Credit Risk Workshops in Des Moines

On April 4th, the OCC announced that it will host two workshops at the Holiday Inn Des Moines Downtown-Mercy Area, Des Moines, Iowa, May 9-10, for directors of national community banks and federal savings associations supervised by the OCC. The Risk Governance workshop on May 9th will combine lectures, discussion, and exercises to provide practical information for directors to effectively measure and manage risks. The workshop will also focus on the OCC’s approach to risk-based supervision and major risks in the financial industry. The Credit Risk workshop on May 10th will focus on credit risk within the loan portfolio, such as identifying trends and recognizing problems. The workshop will also cover the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change.

FDIC

FDIC to Host Economic Inclusion Summit in Arlington, Virginia

On April 7th, the Federal Deposit Insurance Corporation (“FDIC”) announced that it will host an Economic Inclusion Summit on Wednesday, April 26th, to discuss “Strategies to Bring Consumers into the Financial Mainstream.”

Treasury Department Developments

Treasury Department

U.S.-EU Joint Financial Regulatory Forum Joint Statement

On April 6th, the U.S. Department of the Treasury released a joint statement on the U.S.-EU Joint Financial Regulatory Forum, which met on March 28th and 29th in Brussels, Belgium, to exchange views on financial regulatory developments as part of their ongoing regulatory dialogue.

Securities and Exchange Commission

Final Rules

SEC Makes Technical Changes and Inflation Adjustments to Rules Amended by JOBS Act

On March 31st, the SEC approved final rules that make several technical amendments to conform certain rules and forms to amendments made to the Securities Act and the Securities Exchange Act by Title I of the Jumpstart Our Business Startups (“JOBS”) Act. The final rules also amend the definition of “emerging growth company” to adjust the eligibility threshold for inflation as well as make amendments to Regulation Crowdfunding to adjust the dollar amounts used in connection with the crowdfunding exemption for inflation. The final rules will become effective upon publication in the Federal Register. SEC Press Release.

Guidance

Compliance and Disclosure Interpretations: Regulation Crowdfunding

On April 5th, the SEC updated two of its Compliance and Disclosure Interpretations (“C&DIs”) on regulation crowdfunding: Rule 201: Disclosure Requirements and Rule 202: Ongoing Reporting Requirements.

No-Action Relief and Exemptive Orders

SEC Grants Covered Clearing Agencies a Temporary Exemption from Compliance with Rule 17Ad-22(e)(3)(ii)

On April 5th, the SEC granted covered clearing agencies a temporary exemption from compliance with Rule 17Ad-22(e)(3)(ii) and certain requirements in Rules 17Ad-22(e)(15)(i) and (ii) until December 31, 2017. SEC Release No. 34-80378.

Speeches and Statements

OCIE Director Emphasizes Lower Compliance Levels of Independent Advisers in Conference Remarks

Investment News reported on remarks made by Peter Driscoll, acting director of the SEC's Office of Compliance Inspections and Examinations (“OCIE”), at the IA Watch Compliance Conference on April 6th. According to the article, Driscoll raised concerns about independent financial advisers complying with securities regulations, noting that OCIE has observed more compliance issues with these advisers than with those who are on the staff of an advisory firm. 

Other Developments

Equity Market Structure Advisory Committee Suggests Pilot Study of Order Protection Rule

The SEC’s Equity Market Structure Advisory Committee met on April 5th to discuss subcommittee recommendations on Rule 611 of Regulation NMS, also known as the Order Protection Rule, and on regulatory centralization and the liability of self-regulatory organizations (“SROs”). Law 360 reported that the Regulation NMS subcommittee declined to make an official recommendation on the Order Protection Rule, and instead suggested that the SEC design a pilot to study the effects of a repeal of the rule. See also opening remarks by Acting SEC Chair Michael S. Piwowar and SEC Commissioner Kara M. Stein.

Staff Announcements

On April 4th, the SEC announced the departure of Kara Novaco Brockmeyer, Chief of the Enforcement Division’s Foreign Corrupt Practices Act (“FCPA”) Unit, who plans to leave the agency at the end of April.

SEC Makes Available Final Report from Small Business Forum

On March 31st, the SEC released the final report from its 2016 Government-Business Forum on Small Business Capital Formation.  The final report includes, among other things, a summary of the proceedings and a consolidated list of recommendations made from the three break-out groups, which focused on exempt securities offerings, smaller reporting companies, and secondary marketplace for securities of small businesses.

Commodity Futures Trading Commission

DSIO Grants No-Action Relief from CPO Registration to Two Entities

On April 4th, the Division of Swap Dealer and Intermediary Oversight (“DSIO”) granted no-action relief from commodity pool operator (“CPO”) registration to two entities operating collective investment vehicles to manage the assets belonging to a university, its campuses, affiliated schools, and other supporting organizations, subject to certain conditions outlined in the letter. CFTC Letter No. 17-19.

CFTC Announces its First Chief Market Intelligence Officer

On April 3rd, the CFTC announced that it has named Andrew B. Busch as its first Chief Market Intelligence Officer, effective on April 10, 2017.

Federal Rules Effective Dates

April 2017 – June 2017

Federal Deposit Insurance Corporation

Federal Reserve System

Office of the Comptroller of the Currency

Securities and Exchange Commission

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

SEC Approves CBOE’s Amendments to Nonstandard Expirations Pilot

On April 6th, the SEC approved a proposed rule change filed by the Chicago Board Options Exchange Incorporated (“CBOE”) that amended the operation of its nonstandard expirations pilot program to permit CBOE to list weekly and monthly expirations non-consecutively. SEC Release No. 34-80385.

Chicago Stock Exchange

SEC Designates Longer Period to Consider CHX’s Proposed Delay Mechanism

On April 3rd, the SEC designated May 22, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning a proposed rule change filed by the Chicago Stock Exchange Inc. (“CHX”) to adopt the CHX Liquidity Enhancing Access Delay. SEC Release No. 34-80364.

Depository Trust Company

DTC Proposes Changes to Practices and Policies for Credit Risk Rating Matrix

On April 5th, the SEC provided notice of a proposed rule change filed by The Depository Trust Company (“DTC”) that would amend its rules to address and update DTC’s practices and policies with respect to the existing Credit Risk Rating Matrix, which assigns credit ratings to certain participants by evaluating the risks posed by these participants to DTC and its other participants. The proposal would also make rule amendments to provide more transparency and clarity regarding DTC’s current ongoing membership monitoring process. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of April 10, 2017. SEC Release No. 34-80382.

Financial Industry Regulatory Authority

FINRA Proposes to Consolidate Registration Rules and Make Changes to Qualification Exam and Continuing Education Requirements

On April 4th, the SEC requested comments on a proposed rule change filed by the Financial Industry Regulatory Authority (“FINRA”) that would adopt with amendments the NASD and Incorporated NYSE rules relating to qualification and registration requirements as FINRA rules in the Consolidated FINRA Rulebook; restructure the current representative-level qualification examinations; create a general knowledge examination and specialized knowledge examinations; and amend the Continuing Education (“CE”) requirements. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of April 10, 2017. SEC Release No. 34-80371.

FINRA Announces Changes to the Transparency Services FINRA Participant Agreement

In a notice published on April 3rd, FINRA announced changes to the participant application agreement executed by members who must submit reports on over-the-counter secondary market transactions in eligible equity and fixed income securities to the appropriate FINRA facility, including the Trade Reporting and Compliance Engine (“TRACE”), the OTC Reporting Facility, and the Alternative Display Facility. Beginning on April 10, 2017, member firms will be required to execute and submit the FINRA Transparency Services Participation Agreement using the FINRA Firm Gateway.

Fixed Income Clearing Corporation

FICC Proposes Changes to Practices and Policies for Credit Risk Rating Matrix

On April 5th, the SEC requested comments on the Fixed Income Clearing Corporation’s (“FICC”) proposal to amend its rules to address and update FICC’s practices and policies with respect to the existing Credit Risk Rating Matrix, which assigns credit ratings to certain GSD Netting Members and MBSD Clearing Members by evaluating the risks posed by these participants to FICC and its other members. The proposal would also make rule amendments to provide more transparency and clarity regarding FICC’s current ongoing membership monitoring process. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of April 10, 2017. SEC Release No. 34-80383.

SEC Approves FICC’s Proposed New Margin Proxy for Calculating the VaR Charge

On March 30th, the SEC approved FICC’s proposed rule change that would amend its rules to include a minimum volatility calculation called the “Margin Proxy” that would be used in certain circumstances when determining a Netting Member’s daily VaR Charge and to modify the calculation of the Coverage Charge in circumstances where the Margin Proxy applies. SEC Release No. 34-80349.

International Swaps and Derivatives Association 

ISDA Announces Firms Selected to Serve on Determinations Committees

On March 31st, the International Swaps and Derivatives Association (“ISDA”) announced the results of its annual process to determine the composition of five regional Determinations Committees (“DCs”), which determine whether a credit event has occurred in the credit derivatives market. The selected firms will serve on the DCs beginning on April 29, 2017. ISDA Press Release.

Investors Exchange

SEC Takes More Time to Consider IEX’s Proposed Listing Standards for Managed Fund Shares

On March 16th, the SEC designated May 9, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding Investors Exchange LLC’s (“IEX”) proposal to adopt generic listing standards for Managed Fund Shares. SEC Release No. 34-80257.

National Securities Clearing Corporation

NSCC Proposes Changes to Practices and Policies for Credit Risk Rating Matrix

On April 5th, the SEC provided notice of a proposed rule change filed by the National Securities Clearing Corporation (“NSCC”) that would amend its rules to address and update NSCC’s practices and policies with respect to the existing Credit Risk Rating Matrix, which assigns credit ratings to certain members by evaluating the risks posed by these participants to NSCC and its other members. The proposal would also make rule amendments to provide more transparency and clarity regarding NSCC’s current ongoing membership monitoring process. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of April 10, 2017. SEC Release No. 34-80381.

NYSE

NYSE Announces Webcast on Consolidated Audit Trail

On April 6th, New York Stock Exchange LLC (“NYSE”) Regulation announced that the CAT NMS LLC Operating Committee will host a Consolidated Audit Trail (“CAT”) Industry Webcast on April 13, 2017, to provide an update on the progress of the CAT as well as more information on several technical topics. NYSE Information Memo 17-03.

NYSE Exchanges Propose Changes to Rules on Telephone Use by Floor Brokers

On April 4th, the SEC requested comments on NYSE’s and NYSE MKT LLC’s (“NYSE MKT”) separately filed proposals to amend their respective rules to permit Exchange Floor brokers to use non-Exchange provided telephones on the Floor of the Exchange and make other related rule changes. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of April 10, 2017.

NYSE Proposes Changes to Listing Standards for Acquisition Companies

On March 30th, the SEC requested comments on a proposed rule change filed by NYSE that would amend its listing standards for acquisition companies to modify the initial and continued distribution requirements. Comments should be submitted on or before April 27, 2017. SEC Release No. 34-80358.

Industry News

Trump Administration Considering Proposal to Separate Retail Banking from Investment Banking and Trading

On April 6th, DealBook reported that Gary D. Cohn, President Trump’s chief economic adviser, said in a meeting with the Senate Banking Committee that the administration was considering a proposal that would require separating retail banking from investment banking and trading.  

In an Effort to Tackle Gender Pay Gap, British Companies Are Now Required to Publish Average Salaries of Employees

On April 6th, The New York Times reported that new rules have taken effect in Britain requiring companies with 250 or more employees to publish the average salaries of the men and women they employ. The figures must reveal information like salary differences between men and women, differences in average bonuses, and the proportion of men and women who received those bonuses. The companies have until April 2018 to report the information to the government and publish it on their websites and on a government website.