Insights from Winston & Strawn 

Since January 20, there has been a flurry of activity at the White House affecting the regulation of financial services, including the issuance of six executive orders or memoranda.

One of those, as we have previously reported, enunciated seven core principles of financial services regulation, including empowering Americans to make independent decisions and informed choices; fostering economic growth and vibrant financial markets; enabling American companies to be competitive with foreign firms; and making regulation efficient, effective, and appropriately tailored. That executive order further directs the Treasury Secretary to consult with the member agencies of the Financial Stability Oversight Council (the “FSOC”). Those agencies include the Federal Reserve Board, Comptroller of the Currency, the Consumer Financial Protection Bureau (the “CFPB”), the SEC, the FDIC, the CFTC, the FHFA, and the NCUA. The Secretary is to report to the President in 120 days and periodically thereafter on the extent to which existing laws, regulations, and guidance promote the core principles, identifying those that inhibit regulation consistent with those principles.

This may be an opportunity to promote principles-based regulation and to get away from the detailed prescriptive regulation that has become commonplace and is evidenced by notices of adoption of final rules consisting of hundreds of, in some cases more than a thousand, pages of directives. It also may be an opportunity to promote genuine cost-benefits analyses of regulatory requirements. Examination criticism and even enforcement actions are sometimes based on standards that may never have been publicly enunciated by agencies or their staffs, let alone adopted after notice of, and opportunity for, public comment. The facts underlying the PHH case against the CFPB demonstrate a classic case of that. Standards governing acceptability of living wills have also been subject to that type of critique. Bank Secrecy Act/anti-money laundering regulation could use more transparent standards. Of course, this has also been a criticism of the FSOC process for designation of systemically important financial institutions. This also may be an opportunity to require agencies to respond to inquiries by regulated firms and to do so promptly to enable such firms to comply with agency wishes.

There are a great many banking regulations that need review, and this should be an opportunity to re-visit certain rules that are overly broad, such as the Volcker Rule which treats a great many innocent sophisticated financing vehicles as “covered funds” which a bank affiliate may not sponsor and in which it may not have an ownership interest. (Indeed, if theoretical potential abuse of deposit insurance and the discount window is the basis for the rule, it also is not clear why it must apply to parent and sister affiliates of banks.) The still-pending incentive compensation rule appears to be another example of over-breadth, as does the Federal Reserve Board’s proposal to impose capital requirements on insurance savings and loan holding companies already subject to state law capital requirements imposed by state insurance regulators. The executive order’s core principles review should also be an opportunity to re-visit other rules that are merely cynical transfer of wealth from one politically disfavored industry to another, such as the Durbin Amendment. The CFPB’s pending arbitration rule that would revive class actions also seems to fit into that category.

President Trump has also issued another executive order on “A Comprehensive Plan for Reorganizing the Executive Branch,” which, on its face, appears to apply to all of the financial services regulatory agencies, including the CFPB. The order requires the Director of the Office of Management and Budget (the “OMB”) to propose a plan to reorganize governmental functions and eliminate unnecessary agencies, components of agencies, and agency programs and also directs the head of each agency, within 180 days, to submit to the OMB Director a proposed plan to reorganize the agency, if appropriate, to improve its efficiency, effectiveness, and accountability. The definition of the term “agency” (“each authority of the Government of the United States, whether or not it is within … another agency”) appears broad enough to encompass all of the financial services regulatory agencies. The OMB Director is also to seek public comment on such a reorganization and then, 180 days after the deadline for such comment, to submit a proposed plan to the President with recommendations, including for both legislation and administrative measures to accomplish the reorganization. Presumably, since the financial services regulatory agencies and most of their components were created by statute, legislation would appear to be required to eliminate them or any of their components.

Feature: The SEC’s Rejections of Bitcoin ETF Proposals

For the second time in a month, the Securities and Exchange Commission (“SEC”) on March 28th rejected a bid to list a bitcoin exchange-traded fund (“ETF”) on the New York Stock Exchange (“NYSE”). In denying the NYSE Arca Exchange’s filing of a proposed rule change to list and trade shares of the SolidX Bitcoin Trust, the SEC concluded that “the significant markets for bitcoin are unregulated.” Pursuant to the law, the exchange listing the ETF must have surveillance-sharing agreements at the ready with significant, regulated exchanges to monitor trading of the underlying asset. The SEC said in its decision that, since bitcoin exchanges are unregulated, it would be impossible for the NYSE to enter into suitable surveillance agreements. The SEC further referenced Section 6(b)(5) of the Exchange Act, which “requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”

On March 10th, the SEC came to the same conclusion in rejecting a similar proposal from bitcoin entrepreneurs Cameron and Tyler Winklevoss, and the Bats BZX Exchange. The SEC pointed out that, while the exchange listing the bitcoin product must have agreements with major exchanges that monitor trading in the commodity, the only agreement Bats had was with the Gemini Exchange, which trades bitcoin but is not sufficiently regulated.  The SEC noted that the lack of such regulation raises “concerns about the potential for fraudulent or manipulative acts and practices in this market.” On March 17th, Bats petitioned for a review of the SEC’s ruling on the Winklevoss Bitcoin Trust. The petition was filed under Rule 430(b)(1) of the SEC’s Rules of Practice, which allows parties to file a notice of petition within five days of the ruling (or within 15 days of its publishing in the Federal Registrar), as long as clear reasons for the petition are given. Bats’ reasons for its petition include the fact that the SEC’s disapproval of the initial proposal is erroneous as, among other things, the standard applied was inconsistent with prior approval orders. Bats noted that it will be filing another petition for review in accordance with Rule 430(b)(2).

There is a third bitcoin proposal awaiting a decision from the SEC. Grayscale Investments LLC’s Bitcoin Investment Trust, backed by early bitcoin advocate Barry Silbert and his Digital Currency Group, filed an application in 2016 for its Bitcoin Investment Trust to be listed on the NYSE. That ETF is in a somewhat different position, as it currently trades publicly over the counter under alternative reporting standards, which brings it outside SEC regulations. While the timing on a final SEC decision is unclear, this proposal is also expected to be rejected. 

FINRA – Regulatory Matters at a Glance

Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.

Banking Agency Developments


OCC Hosts Risk Governance and Credit Risk Workshops in Charlotte

The OCC announced that it will host two workshops at the Sheraton Charlotte Airport Hotel, Charlotte, N.C., April 25-26, for directors of national community banks and federal savings associations supervised by the OCC. On April 25th, the Risk Governance workshop will provide practical information for directors to effectively measure and manage risks, and will also focus on the OCC’s approach to risk-based supervision and major risks in the financial industry. On April 26tj, the Credit Risk workshop will focus on credit risk within the loan portfolio, such as identifying trends and recognizing problems, and will also cover the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change.     


CFPB Proposes Changes to Regulation B to Help Mortgage Lenders

On March 24th, the CFPB announced its release of a proposal to amend Regulation Bto provide additional flexibility for mortgage lenders concerning the collection of consumer demographic information. Comments on the proposal will be due 30 days after it is published in the Federal Register.

Securities and Exchange Commission


Securities Act Rules Updated

On March 31st, the SEC updated the following Compliance and Disclosure Interpretations (“C&DIs”) from Section 182:

Speeches and Statements

Piwowar Sees Benefits of Disclosure-Oriented Regulation for Banks

In remarks at the SEC’s 27th Annual International Institute for Securities Market Growth and Development on March 27th, Acting SEC Chair Michael S. Piwowar discussed how the regulatory approach to disclosure, enforcement, international cooperation, and FinTech impacts the growth and development of capital markets. Piwowar objected to the imposition of “bank prudential regulation in the capital market space,” maintaining that “the disclosure-oriented focus of market based regulation would provide better protection to the international financial system than what we have now.”

Bricker Highlights Ways to Reinforce Audit Committee Effectiveness

In remarks at the University of Tennessee’s C. Warren Neel Corporate Governance Center on March 24th, SEC Chief Accountant Wesley R. Bricker considered ways to enhance the effectiveness of audit committees to support high quality financial reporting. Among other things, Bricker emphasized the benefit of increasing audit committee diversity, the importance of balancing audit committee workload, and the need for audit committees to stay current on accounting and financial reporting developments, including new GAAP standards, internal control over financial reporting, and non-GAAP and key operational metrics.     

Other Developments

SEC Announces Agenda for Equity Market Structure Advisory Committee Meeting

On March 30th, the SEC released the agenda for the upcoming meeting of its Equity Market Structure Advisory Committee, which will take place on April 5, 2017. Among other things, the Committee will consider preliminary recommendations from its subcommittees regarding the trade-through exemption under Rule 611 of Regulation NMS and SRO rule-based limitations of liability.

Staff Announcements

The SEC announced on March 30th that Sagar S. Teotia will serve as a Deputy Chief Accountant in the SEC’s Office of the Chief Accountant.

SEC Issues Annual Report on Efforts to Increase Inclusion of Women and Minorities

On March 30th, the SEC’s Office of Minority and Women Inclusion released its annual report to Congress, which details the efforts made by the SEC to enhance diversity in the agency’s workforce and promote the use of minority-owned and women-owned businesses in the agency’s business activities.

OIG Recommends Improvements to Corporation Finance’s Handling of Requests for No-Action Letters and Other Guidance

On March 27th, the Office of the Inspector General (“OIG”) released a final report containing the results of its audit of how the SEC’s Division of Corporation Finance manages requests for no-action and interpretive letters, exemptions, and waivers. The final report recommended that the Division update or develop standardized policies and procedures for receiving, recording, and responding to requests; communicate those policies and procedures to staff; and perform periodic validations of data recorded in the no-action letter database to ensure the data’s accuracy and completeness.

Commodity Futures Trading Commission

James McDonald Appointed as Enforcement Director

On March 30th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced the appointment of James McDonald to be the Director of the agency’s Enforcement Division, starting on April 10.     

Market Risk Advisory Committee Meeting

The CFTC’s Market Risk Advisory Committee (“MRAC”) announced that it is holding a public meeting on April 25, 2017 at the agency’s Washington, D.C., headquarters. The MRAC will discuss the staff’s response to the CRM Subcommittee’s recommendations on how Central Counterparties can further enhance their efforts in preparing for the default of a significant clearing member. The MRAC will also discuss cybersecurity trends and how well the derivatives markets are currently functioning.     

CFTC Staff Provides Relief Associated with Swap Trade Confirmations

On March 24th, the CFTC’s Division of Market Oversight announced its issuance of a no-action letter extending relief associated with swap trade confirmation requirements.

Federal Rules Effective Dates

April 2017 – June 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Financial Industry Regulatory Authority

FINRA Announces Effective Date of Rule Changes Related to the Financial Exploitation of Seniors

In a Regulatory Notice published on March 30th, the Financial Industry Regulatory Authority (“FINRA”) announced that new and amended rules aimed at preventing the financial exploitation of seniors, which the SEC approved earlier this year, will become effective on February 5, 2018. Under the new and amended rules, FINRA members will be allowed to place temporary holds on disbursements of funds or securities from the accounts of specified customers in cases where they reasonably believe financial exploitation of these customers has occurred and will also be required to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. FINRA Press Release.

FINRA Announces 2017 GASB Accounting Support Fee

In a Regulatory Notice published on March 24th, FINRA announced the details of the 2017 Governmental Accounting Standards Board (“GASB”) accounting support fee, which FINRA collects from its member firms that report trades to the Municipal Securities Rulemaking Board (“MSRB”) to help fund the GASB’s annual budget. Beginning in April 2017, FINRA will assess and collect $2,077,250 from its member firms each calendar quarter for a total accounting support fee of $8,309,000 in 2017.     

Fixed Income Clearing Corporation

FICC Proposes New Service for Central Clearing of Institutional Tri-Party Repo Transactions

On March 24th, the SEC requested comments on a proposed rule change filed by the Fixed Income Clearing Corporation (“FICC”) that would, among other things, establish the “Centrally Cleared Institutional Tri-party Service” to make central clearing available to the institutional tri-party repurchase agreement (“repo”) market. Comments should be submitted on or before April 20, 2017. SEC Release No. 34-80303.

SEC Grants Accelerated Approval to ICE Clear Europe’s Rule Amendments on Default Provisions in Resolution

On March 24th the SEC granted accelerated approval to a proposed rule change filed by ICE Clear Europe Limited (“ICE Clear Europe”) to amend its clearing rules relating to the application of default provisions in the event of a resolution proceeding. The SEC also requested comments on an amendment to the proposed rule change, which makes technical corrections to the proposal. Comments should be submitted on or before April 20, 2017. SEC Release No. 34-80304.    

International Swaps and Derivatives Association

ISDA Updates OTC Derivatives Compliance Calendar

On March 30th, the International Swaps and Derivatives Association (“ISDA”) published an updated version of its OTC Derivatives Compliance Calendar.

ISDA Announces New Islamic Credit Support Deed

On March 30th, ISDA and the International Islamic Financial Market (“IIFM”) released a new credit support deed for Islamic hedging transactions. The new credit support deed, which responds to global variation margin requirements for non-cleared trades, governs the exchange of collateral for hedging transactions under the ISDA/IIFM Tahawwut (Hedging) Master Agreement. ISDA Press Release.     

Municipal Securities Rulemaking Board

MSRB Proposes Continuing Education Requirements for Municipal Advisors

On March 29th, the SEC requested comments on a proposed rule change filed by the MSRB that would, among other things, amend MSRB Rule G-3, on professional qualification requirements, to establish continuing education requirements for municipal advisors; make accompanying amendments to MSRB Rule G-8, on books and records to be made by brokers, dealers and municipal securities dealers and municipal advisors; and make minor technical changes to Rule G-3. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of April 3, 2017. SEC Release No. 34-80327.     


SEC Approves NYSE’s Amendments to Rules on Designated Market Maker Units

On March 29th, the SEC issued an order approving a proposed rule change filed by the New York Stock Exchange LLC (“NYSE”) that would amend Rule 98 to provide that, while on the Trading Floor, an individual member, officer, partner, employee or associated person of a Designated Market Maker Unit (“DMMs”) must trade DMM securities at their assigned stock trading post location and may not trade any security that is a related product of their DMM securities. SEC Release No. 34-80334.

SEC Takes More Time to Consider NYSE MKT’s Proposed Rules for Market Makers on Pillar

On March 29th, the SEC designated May 14, 2017, as the date by which it will determine whether to approve, disapprove, or instituted disapproval proceedings regarding NYSE MKT LLC’s (“NYSE MKT”) proposal to adopt the rules relating to market makers that would be applicable when NYSE MKT transitions trading to Pillar, its new trading technology platform.  SEC Release No. 34-80336.

SEC Designates Longer Period for Consideration of NYSE MKT’s Proposed Transition to Pillar

On March 29th, the SEC designated May 16, 2017, as the date by which it will determine whether to approve, disapprove, or institute disapproval proceedings regarding NYSE MKT’s proposal to transition trading on NYSE MKT to Pillar and to operate as a fully automated cash equities market. SEC Release No. 34-80337.

SEC Approves NYSE Exchanges’ New Market Maker Light Only Quotation

On March 29th, the SEC approved NYSE’s and NYSE Arca Inc.’s (“NYSE Arca”) separately filed proposals to amend their respective rules on Market Maker Quotations to define a Market Maker “quote,” add a new Market Maker Light Only Quotation, and specify how such quotes would be processed when a series is open for trading.

NYSE Proposes Changes to Requirements for Companies that List without Prior Exchange Act Registration

On March 27th, the SEC requested comments on a proposed rule change filed by NYSE that would modify the provisions relating to the qualification of companies listing without a prior Securities Exchange Act registration. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of April 3, 2017. SEC Release No. 34-80313.

SEC Approves NYSE Exchanges’ Proposed Amendments to Co-Location Services

On March 24th, the SEC granted accelerated approval to NYSE’s and NYSE MKT’s separately filed proposals to amend their respective rules to modify the co-location services offered by the exchanges to add certain access and connectivity fees. The SEC also requested comments on amendments to the proposals, which, among other things, provide and establish fees for connectivity to three additional Third Party Data Feeds. Comments on the amendments should be submitted on or before April 20, 2017.

Industry News

Bill Seeks Higher SEC Enforcement Penalties

On March 30th, InvestmentNews reported on a newly introduced bill that would allow the SEC to substantially increase enforcement sanctions so that a maximum $1 million penalty would be imposed on individuals per violation for the most serious offenses and a maximum $10 million per violation would be imposed on financial firms. The measure would also give the SEC leeway to triple the cap for repeat offenders.     

Democrats Call for Investigation Into Reviews Ordered by Piwowar

On March 29th, Reuters reported that Democrats on the Senate Banking Committee sent a letter to the SEC’s internal watchdog stating that acting SEC Chairman Mike Piwowar exceeded his authority by taking steps to scale back or delay rules required by Dodd-Frank. The Democrats wrote that Piwowar should not have ordered staff to review the agency’s rules on conflict minerals and CEO pay ratios, as they are mandated by Congress.    

Republican Senators Request Review of ‘Too Big to Fail’ Labeling

Ten Republican lawmakers wrote a letter to Treasury Secretary Steve Mnuchin, who chairs the Financial Stability Oversight Council, asking him to evaluate the process a government council uses to label non-bank institutions “too big to fail.” According to Reuters on March 28th, the letter stated that the current designation process “lacks transparency and accountability, insufficiently tracks data, and does not have a consistent methodology for determinations.”     

U.S. Supreme Court to Examine Securities Fraud Case

The U.S. Supreme Court will hear an appeal in a case in order to clarify investors’ ability to sue companies for omitting information from shareholder reports. Lower courts disagree on whether a violation of Item 303, an SEC provision, is enough to allow investors sue for securities fraud. Bloomberg.