Insights from Winston & Strawn

On March 22, 2017, the Securities and Exchange Commission (SEC) adopted an amendment to Rule 15c6-1(a) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), to shorten the standard settlement cycle for certain broker-dealer transactions from three business days after the trade is executed (T+3) to two business days (T+2). Broker-dealers will be required to comply with the amended rule beginning on September 5, 2017. According to the SEC’s press release, the amended rule is designed to “enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.”  As stated in the rule, the T+2 requirement would not apply to certain categories of securities, such as exempted securities, just as the T+3 settlement cycle had not applied. Of note, many outstanding warrants, convertible securities and similar instruments permit settlement based on the old T+3 standard. Investors who hold and/or rely on such securities to settle trades are encouraged to evaluate the implications of the shorter settlement period.  To assist broker-dealers and other market participants in their compliance with the new T+2 settlement cycle, the SEC has established a dedicated email address: [email protected].

Feature: Shadow Banking Developments

Despite initial signs that the Trump administration would move quickly to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), political realities and other legislative priorities have served as a roadblock to what some hoped would be swift relief for banks from the Dodd-Frank’s onerous regulatory requirements. While traditional banks await congressional action, “shadow banks” continue to operate outside of Dodd-Frank’s regulatory framework. According to analysts at investment firm Keefe, Bruyette & Wood, shadow banks’ growth outpaced that of their traditional counterparts in 2016, a year in which shadow banks expanded their assets by 5 percent for a total of $18 trillion in assets. By comparison, traditional commercial lenders increased their assets by 2 percent for a total of $16 trillion.

Global regulators continue to make shadow banking a significant focus. The Basel Committee on Banking Supervision published proposed guidelines on March 15th that would establish criteria for the identification and management of step-in risk in banks’ relationships with shadow banks and other unconsolidated entities. The guidelines define step-in risk as the risk that banks might offer support to entities beyond their contractual obligations in an effort mitigate damage to their reputation that may result from their connection to those entities. Step-in risk, consequently, could affect a bank’s capital and liquidity positions. Comments on the proposed guidelines should be submitted on or before May 15, 2017.

Financial Stability Board (“FSB”) Chair Mark Carney told G20 Finance Ministers and Central Bank Governors in a letter that the FSB will prioritize its objective of transforming shadow banking into resilient market-based finance. In his letter, Carney noted that, while the “toxic forms of shadow banking […] have declined to the point where they no longer represent a global stability risk,” the FSB will encourage its members to remain vigilant to “new forms of shadow banking activities [that] are certain to develop in the future” and may require a global regulatory response.

Banking Agency Developments


Mortgage Performance Continues to Improve 

On March 24th, the Office of the Comptroller of the Currency (“OCC”) announced that, according to its most recent quarterly report on mortgages, the overall performance of first-lien mortgages continues to improve while the number of loans in delinquency continues to decline. The OCC Mortgage Metrics Report, Fourth Quarter 2016, showed 94.7 percent of mortgages included in the report were current and performing at the end of the quarter, compared with 94.1 percent a year earlier.

OCC Reports Fourth Quarter 2016 Bank Trading Revenue Increased to $6 Billion

March 23rd, the OCC announced that it has released its Quarterly Report on Bank Trading and Derivatives Activities. According to the report, trading revenue of U.S. commercial banks and savings associations increased to $6 billion in the fourth quarter of 2016, $1.7 billion higher than the fourth quarter a year earlier.

Banking Agencies Issue Joint Report to Congress under the Economic Growth and Regulatory Paperwork Reduction Act of 1996

On March 21st, the Federal Financial Institutions Examination Council (“FFIEC”) announced that its member agencies, continuing their efforts to reduce regulatory burdens while ensuring the safety and soundness of the nation’s financial institutions, issued a joint report to Congress detailing their review of rules affecting financial institutions. The review was conducted as part of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (“EGRPRA”) by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation, and in conjunction with the National Credit Union Administration.


Agencies Complete Resolution Plan Evaluation of 16 Domestic Firms, Issue Guidance to Four Foreign Banking Organizations

On March 24th, the Federal Deposit Insurance Corporation (“FDIC”) and the Federal Reserve Board jointly announced that they had completed their evaluation of the 2015 resolution plans of 16 domestic banks and separately issued guidance to four foreign banks.     

Federal Reserve

Federal Reserve System Publishes Annual Financial Statements

On March 24th, the Federal Reserve announced its release of the 2016 combined annual audited financial statements for the Federal Reserve Banks, as well as statements for the 12 individual Federal Reserve Banks and the Board of Governors.     


CFPB Issues Proposal to Provide Flexibility to Certain Mortgage Lenders in Collecting Information

On March 24th, the Consumer Financial Protection Bureau (“CFPB”) announced its release of a proposal to amend Equal Credit Opportunity Act regulations to provide additional flexibility for mortgage lenders in the collection of consumer ethnicity and race information. According to the CFPB, the proposed amendments will provide greater clarity to lenders regarding their obligations under the law, while promoting compliance with rules intended to ensure consumers are treated fairly. Comments on the proposal will be due 30 days after it is published in the Federal Register.

Securities and Exchange Commission

Final Rules

SEC Adopts Shortened Settlement Cycle for Securities Transactions

At an Open Meeting on March 22nd, the SEC voted to adopt an amendment to Securities Exchange Act Rule 15c6-1(a) that would shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade is executed (“T+3”) to two days (“T+2).  The compliance date for the rule amendment is September 5, 2017. The SEC established a dedicated email address for broker-dealers and other stakeholders to the submit inquiries to SEC staff as they prepare for the implementation of the T+2 settlement cycle.  Acting SEC Chair Michael S. Piwowar maintained that the shortened settlement cycle will reduce “the time horizon for risk exposures as well as for potential liquidity pressures, which should yield other benefits for market participants and the clearance and settlement infrastructure as a whole.” SEC Commissioner Kara M. Stein called the amended rule “an improvement from the current T+3 standard,” but indicated that she has asked staff to “consider further improvements,” including the possibility of moving to T+1 or end-of-the-day settlement cycles.  

SEC Approves Updated EDGAR Filer Manual

On March 13th, the SEC adopted a final rule that approves revisions to the EDGAR Filer Manual and related rules. Among other things, the revised manual, which became effective on March 9, 2017, reflects updates to the EDGAR system to support the new online version of Transfer Agent submission form types, the US GAAP 2017 Taxonomy, and the ability for filers to submit duplicate filings for submission form type 10-D.     

No-Action Relief and Exemptive Orders

Division of Trading and Markets Grants Deutsche Bank Exemption from Rules 101 and 102 of Regulation M

On March 17th, the SEC’s Division of Trading and Markets (“Division”) granted an exemption from Rules 101 and 102 of Regulation M under the Securities Exchange Act of 1934 to Deutsche Bank Aktiengesellschaft, a corporation organized under the laws of the Federal Republic of Germany. The Division noted that it granted the exemption, pursuant to specified conditions, so that Deutsche and certain affiliates can conduct specified activities in the ordinary course of business outside the U.S.       

Speeches and Statements

Piwowar Reveals Pilot Plan to Lower Exchange Access Fees

On March 23rd, Reuters summarized the keynote address delivered by SEC Acting Chair Michael S. Piwowar at an event at Columbia University. In his address, Piwowar announced the launch of a pilot program designed by SEC staff to gauge the market effect of lower access fees charged by exchanges to broker-dealers for executing trades.

Bricker Highlights Implementation of Revenue Recognition Standard and ICFR in Remarks on Credible Financial Reporting

In remarks at the Annual Life Sciences Accounting & Reporting Congress on March 21st, SEC Chief Accountant Wesley R. Bricker discussed the importance of the timely and thoughtful implementation of the new revenue recognition standard as well as effective internal control of financial reporting (“ICFR”) in reinforcing and advancing credible financial reporting.    

Other Developments

SEC Opens Registration for 2017 Compliance Outreach Seminars for Investment Companies and Investment Advisers

On March 23rd, the SEC announced the dates for its 2017 compliance outreach seminars for investment companies and investment advisers, which will be jointly sponsored by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), the Division of Investment Management, and the Asset Management Unit of the Division of Enforcement. Registration for the seminars, which will take place in four cities in May and June, should be completed at least two weeks prior to the event date.

Commodity Futures Trading Commission

Ex-CFTC Chief References ‘Massive Amount of Misconduct’ in Derivatives

On March 24th, Reuters reported that former Commodity Futures Trading Commission (“CFTC”) enforcement chief Aitan Goelman said in an interview that a “massive amount of misconduct” in futures, options and swaps markets goes unnoticed because of insufficient data mining. Goelman added that, owing to a lack of resources, the CFTC does not have the sophisticated software and staff needed to uncover many of the suspicious trading patterns inside the 325 million records filed each day. Goelman noted that there is a lot more manipulation, insider trading, front-running and Ponzi scheming in the markets than is being prosecuted.

Federal Rules Effective Dates

March 2017 – May 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Bats Global Markets

BZX Will Appeal SEC’s Rejection of Bitcoin Exchange-Traded Fund

Journal reported on March 22nd that Bats BZX Exchange (“BZX”) will petition the SEC to reconsider the disapproval of its proposal to list and trade shares of the Winklevoss Bitcoin Trust, which was rejected by SEC staff pursuant to delegated authority.     

Chicago Board Options Exchange

CBOE Proposes Amendments to Complex Order Rules

On March 20th, the SEC requested comments on a proposed rule change filed by the Chicago Board Options Exchange Incorporated (“CBOE”) that would amend its rules related to complex orders by, among other things, simplifying the definitions of the complex order types that may be made available on a class-by-class basis, setting forth applicable ratios for a complex order in open outcry to be eligible for complex order priority within applicable priority rules, and clarifying the applicable minimum increment for complex orders in open outcry. Comments should be submitted on or before April 14, 2017. SEC Release No. 34-80279.

SEC Institutes Disapproval Proceedings Regarding CBOE’s Proposal on Open Outcry Priority and Allocation Requirements

On March 17th, the SEC instituted proceedings to determine whether to approve or disapprove CBOE’s proposed rule change to amend its rules regarding responsibility for ensuring compliance with open outcry priority and allocation requirements and trade-through prohibitions. Comments should be submitted on or before April 13, 2017. Rebuttals are due on or before April 27, 2017. SEC Release No. 34-80270.    

Depository Trust Company

SEC Seeks Comments on DTC’s Proposal on Use of Sub-Accounts with Euroclear Joint Venture

On March 20th, the SEC provided notice of a proposed rule change filed by The Depository Trust Company (“DTC”) that would add a new rule to provide that any DTC Participant that is, or is acting on behalf of, a user of certain collateral management services (“CMS”) of DTCC Euroclear Global Collateral Ltd. (“DEGCL”) may establish one or more sub-accounts for use in connection with CMS. The proposal would also permit DEGCL to receive account and transactional information and reports with respect to the sub-accounts. Comments should be submitted on or before April 14, 2017. SEC Release No. 34-80280.     

Financial Industry Regulatory Authority

FINRA Invites Comments on Its Engagement Programs

In a Special Notice published on March 21st, the Financial Industry Regulatory Authority (“FINRA”) requested comments on potential enhancements to its programs for engaging with members and other stakeholders, including FINRA’s advisory and ad hoc committees, rulemaking process, and member relations programs. FINRA invited the comments, which should be submitted on or before May 5, 2017, as part of an initiative to conduct a comprehensive review of its operations and programs. FINRA Press Release.       

ICE Clear Credit

ICE Clear Europe Proposes Changes to its End-of-Day Price Discovery Policy

17th, the SEC requested comments on a proposed rule change filed by ICE Clear Europe Limited (“ICE Clear Europe”) that would revise its End-of-Day Price Discovery Policy to implement a new direct price submission process for Clearing Members. Comments should be submitted on or before April 13, 2017. SEC Release No. 34-80269.     


NYSE Exchanges Propose to Make Permanent Pilot Program for Cabinet Transactions

March 17th, the SEC provided notice of NYSE MKT LLC’s (“NYSE MKT”) and NYSE Arca Inc.’s (“NYSE Arca”) separately filed proposals to amend their respective rules to make permanent a program that allows transactions to take place at a price that is below $1 per option contract. Comments should be submitted on or before April 13, 2017.

SEC Takes More Time to Consider NYSE MKT’s Proposed Delay Mechanism

On March 17th, the SEC designated May 16, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE MKT’s proposed rule change to amend Rules 7.29E and 1.1E to provide for an intentional delay to specified order processing. SEC Release No. 34-80268.

Judicial Developments

SEC Can Disgorge Ill-Gotten Funds from Attorney Who Received $5 Million from Alleged Ponzi Client 

The SEC moved for disgorgement against appellant attorney, alleging that he received $5 million from his client, who unlawfully raised the money through a pyramid scheme. Appellant contested his liability as a “relief defendant,” arguing that he received the fraudulent funds as a loan. On March 21st, the Ninth Circuit affirmed the district court’s assertion of jurisdiction over appellant as a relief defendant to determine the legal and factual legitimacy of his claim to the $5 million, adding that the court correctly held that the funds sought were proceeds of illegal activity and subject to disgorgement. Securities and Exchange Commission v. Messina.

Industry News

Cornell Law Starting JD Technology Program on NYC’s Roosevelt Island

DealBook reported that Cornell Law School plans to offer a new juris doctorate information and technology law program at the Cornell Tech campus on Roosevelt Island in New York City starting in the spring semester of 2018. Students at Ithaca’s Cornell Law will be able to study technology information, particularly privacy and cybersecurity, at the school’s new technology campus. The program will accommodate up to 20 full-time law students per semester.

British Hedge Fund Firm Granted Injunction to Block ‘Confidential’ Reuters Story

March 24th, Reuters reported that British hedge fund firm Brevan Howard Asset Management has been granted an injunction to prevent Reuters from publishing a story that the firm says is based on confidential information. A High Court judge determined that “the information in question was confidential and … public interest in the maintenance of confidentiality outweighed the public interest in disclosure.” Pursuant to Britain’s legal system, individuals and companies can file for privacy or confidentiality injunctions to attempt to stop the media from publishing information that they consider to be confidential.

Theranos to Give Shares in Return for Investors’ Promise Not to Sue

On March 23rd, The Wall Street Journal reported on Theranos Inc.’s alleged plans to offer additional shares to investors who pledge not to sue the company or Elizabeth Holmes, its founder and chief executive. Pursuant to the deal, investors who participated in Theranos’s latest funding rounds could receive approximately two additional shares for each share that they purchased. The additional shares would purportedly come from Holmes’s personal stake in the company, which would result in her surrendering her majority ownership.