Insights from Winston & Strawn

Last Friday, February 3rd, President Trump took formal action toward his stated policy of repealing parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and repealing the Department of Labor’s “fiduciary” rule.

With respect to the Dodd-Frank Act and related regulations, the President signed an Executive Order directing the Secretary of the Treasury to consult with the heads of member agencies of the Financial Stability Oversight Council (which is comprised of the primary federal regulators of the US financial system many of which are independent agencies and, therefore, not subject to direct presidential control) to determine whether existing laws and regulations promote six “core principles.” It is important to note that this review may represent an ongoing effort to scale-back the extent of the Dodd-Frank Act and that the Secretary of the Treasury may have multiple bites at the apple as the Executive Order references “subsequent reports” and requires the Secretary of the Treasury to report initially within 120 days and “periodically thereafter.” A copy of the Executive Order can be found here. The core principles are (i) empower Americans to make financial decisions, save for retirement and build wealth, (ii) prevent tax-payer funded bailouts, (iii) conduct rigorous regulatory impact analysis that addresses systemic risk and market failures, (iv) make American companies more competitive in both foreign and domestic markets, (v) advance American interests when negotiating international regulatory matters and (vi) restore public accountability within the Federal financial regulatory framework. Additionally, the Secretary of the Treasury is to report on what actions have been (and are being) taken to promote and support the core principles. Finally, the initial report and any subsequent reports must identify any laws and regulations that inhibit the regulation of the financial system in a manner consistent with the core principles.

With respect to the ERISA fiduciary rule, President Trump issued a Presidential Memorandum (the “Memorandum”) to the U.S. Secretary of Labor ordering a review of the ERISA fiduciary rule that was issued last April. A copy of the Memorandum can be found here. The President has ordered the Department of Labor (“DOL”) to prepare an economic and legal analysis of the likely impact of the rule and revise or rescind the rule if it is inconsistent with the Trump administration’s policies. In particular, the Memorandum asks the DOL to review whether the rule (i) has harmed, or is likely to harm, investors; (ii) has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and (iii) is likely to cause an increase in litigation and an increase in the cost of retirement services. Notably, the President’s order to the DOL came in the form of a Presidential Memorandum, rather than a Presidential Order (which he used for the Dodd Frank Act review discussed above). Although both forms of direction from the President carry the same force over an executive agency, such as the DOL, a Presidential Memorandum can be viewed as sending a somewhat less authoritative message. The rule is currently scheduled to take effect as of April 10, 2017.

Importantly, the Memorandum does not order a delay of the implementation date of the fiduciary rule, though the initial draft of the Memorandum that had been circulated to the media (but not the final Memorandum) contained both a specific order to delay the rule by 180 days and a reference to the DOL’s legal authority to do so (5 U.S.C. 705 – Relief Pending Review). In response to the Memorandum, acting U.S. Secretary of Labor, Ed Hugler, issued the following statement: “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s Memorandum.” We can report that many are speculating that the rule will be delayed at least 180 days, but delay is by no means assured. The most significant issue at this time is what measures may be available to the DOL to delay the rule. In this regard, it is not clear whether DOL will be able to rely upon 5 U.S.C. 705, the provision referenced in the draft Memorandum, for this purpose. Reissuing regulations (and thus reopening a notice and comment period) will take time – perhaps more time than is available given the current April 10, 2017 implementation date. Also, it should be noted that the new Secretary of Labor, Andrew Puzder, is not expected to be confirmed until at least mid-February, which also may affect how fast the DOL will act.

On a final note, there are some other strategies not directly involving DOL action which could delay or overturn the rule. First, there continue to exist a number of lawsuits challenging the rule. It is possible that one of these lawsuits may be successful. A ruling is expected as early as this week from the U.S. District Court for the Northern District of Texas regarding the most significant and largest lawsuit filed to date. Also, Congress could conceivably take action to halt the rule, though it appears unlikely that it would do so at this juncture.

Feature: Attempts to Overhaul Financial Regulations under the New Administration

On January 31st, Securities and Exchange Commission (“SEC”) Acting Chair Michael Piwowar, who referred to the Obama-era conflict minerals disclosure rule as “misguided,” directed agency staff to reevaluate whether the rule is still appropriate. In a statement entitled, “Reconsideration of Conflict Minerals Rule Implementation,” Piwowar, in his first major directive since assuming the acting SEC chair seat in January and just one day after Trump signed an executive order that seeks to cut government regulations, stated that he asked his staff to decide “whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate.” Piwowar, who raised national security concerns posed by the rule, said that it has done nothing to help the humanitarian crisis in Africa, and cited the U.S. Court of Appeals for the D.C. Circuit 2014 decision that the rule violated the First Amendment, also requested comments from the public on all aspects of the rule and guidance, “within the next 45 days” from his January 31st statement. The leadership role of Piwowar, who was designated acting chair by Trump on January 23rd, will conclude as soon as the Senate confirms Jay Clayton as SEC Chair, but he can remain at the agency in his role as a commissioner until the end of his term in 2018.

According to Reuters, the conflict minerals rule, which requires companies to disclose whether their products contain metals originating from war-ravaged parts of Africa and applies to manufacturing companies who utilize minerals like gold and tungsten in their product supply chains, is “one of several SEC disclosure rules required by the 2010 Dodd-Frank law that Republicans and business groups have long sought to repeal, saying they force companies to furnish politically charged information that is irrelevant to making investment decisions.”  Businesses are also losing a large amount of money and time in compliance with the rule, as determined by research at Tulane University, which found that companies in complying with the rule expended approximately $709 million and six million staff hours in 2014. CFO.

In another attempt to dismantle Obama-era financial regulation, Congress approved a resolution to repeal the “extraction rule,” an anti-corruption rule instituted by the SEC on June 27, 2016, which requires energy companies to disclose the taxes and other fees they pay to foreign governments. According to MarketWatch, Rex Tillerson, who was just confirmed as secretary of state, had lobbied against the extraction rule when he was CEO at Exxon.

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


Dodd-Frank Act Stress Test Scenarios for 2017

On February 3rd, the Office of the Comptroller of the Currency (“OCC”) announced its release of economic and financial market scenarios that will be used in the upcoming stress tests for covered institutions with more than $10 billion in assets. The supervisory scenarios include baseline, adverse, and severely adverse scenarios, as described in the OCC’s final rule that implement stress test requirements Dodd-Frank. See 2017 Dodd-Frank Act Annual Stress Test Scenario Information. Also see Policy Statement on the Principles for Development and Distribution of Annual Stress Test Scenarios.

Interim Final Rule: Availability of Information under FOIA

On February 1st, the OCC announced that it has published an interim final rule to amend its regulations governing the disclosure of information pursuant to requests made under the Freedom of Information Act (“FOIA”). Comments on the rule must be received by February 21, 2017.

Federal Reserve

Board Releases Scenarios for 2017 CCAR and Dodd-Frank Stress Test Exercises

On February 3rd, the Board announced that it has released the scenarios to be used by banks and supervisors for the 2017 Comprehensive Capital Analysis and Review (“CCAR”) and Dodd-Frank stress test exercises. The Board also issued instructions to firms participating in CCAR

Securities and Exchange Commission


Trading & Markets Offers Guidance on New Electronic Filing Process for Broker-Dealer Annual Reports

The SEC’s Division of Trading and Markets published new instructions for broker-dealers filing their annual reports via EDGAR. The new instructions reflect a simplified filing process for the annual reports due to changes to the EDGAR system that will allow all of the items in the reports to be uploaded as one public document or as one public document and one confidential document.     

No-Action Relief

Canadian Issuers May Use Form F-7 to Register Rights Offerings under Amended Prospectus-Exempt Regime

On February 1st, the SEC’s Division of Corporation Finance issued a no-action letter in which it indicated that it would not object if a Canadian reporting issuer conducting an offering of rights pursuant to Canada’s amended regime for prospectus-exempt rights offerings used Form F-7 to register the offering under the Securities Act. The letter responds to a request for clarification about whether Form F-7 remains available for use by Canadian foreign private issuers who conduct a rights offering pursuant to the amended regime, which, among other things, uses a streamlined offering circular and does not require prior review of the circular by Canadian securities commission staff. 

Trading & Markets Updates No-Action Letter on Electronic Filing of Broker-Dealer Reports to Reflect Changes to EDGAR

In a no-action letter to the Financial Industry Regulatory Authority (“FINRA”) on January 27th, the SEC’s Division of Trading and Markets advised that it would not recommend enforcement action if a broker-dealer or OTC derivatives dealer files the required annual and supplemental reports electronically through the EDGAR system in accordance with the new instructions and conditions contained on the SEC's website in lieu of filing them in paper form.  The Division explained that changes to the EDGAR system will now allow broker-dealers to file their reports with no more than two attachments rather than uploading each component of the report as a separate attachment, simplifying a process that some filers complained was complicated and time consuming.   

Statements and Speeches

Piwowar Won’t Just Be a Placeholder in Interim Role

In an interview with Bloomberg on February 2nd, acting SEC Chair Michael S. Piwowar said the SEC would move forward with its work, indicating that he will not serve only as a “placeholder” while waiting for a new agency head to be confirmed. Piwowar suggested that the SEC may begin a review of Regulation NMS and Dodd-Frank disclosure requirements for public companies during his tenure as interim chair.

Piwowar Asks for Reconsideration of Conflict Minerals Rule

In a statement issued on January 31st, acting SEC Chair Michael S. Piwowar announced that he has directed staff to reconsider whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate. Piwowar also announced that the SEC will accept comments from interested parties on the reconsideration of the conflict minerals rule and guidance. Comments should be submitted within 45 days of Piwowar’s January 31st statement.

Other Developments

Investment Management Releases New Set of Private Fund Statistics

On February 3rd, the SEC’s Division of Investment Management published private fund statistics for the second quarter of 2016.

SEC Completes Review of FASB’s 2017 Accounting Support Fee

On January 31st, the SEC issued an order regarding its review of the Financial Accounting Standards Board’s (“FASB”) accounting support fee for calendar year 2017, which determined that the accounting support fee is consistent with Section 109 of the Sarbanes-Oxley Act. In connection with the review, the SEC requested that, among other things, the FASB conduct an assessment of the efficiency and effectiveness of the U.S. GAAP Financial Reporting Taxonomy and report the findings prior to submitting its 2018 budget and accounting support fee to the SEC for review.

EDGAR Updates

On January 30th, the SEC released the EDGAR Form X-17A-5 XML Technical Specification (Version 2), the EDGAR Filer Manual (Volume I) General Information (Version 26), the EDGAR Filer Manual (Volume II) EDGAR Filing (Version 40), and the EDGAR Filer Manual (Volume III) N-SAR Supplement (Version 6).

Staff Announcements

On January 30th, the SEC announced that Marc Wyatt, Director of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), plans to leave the agency in February. Wenchi Hu, an Associate Director in the Division of Trading and Markets, will also leave the SEC at the beginning of February.

Commodity Futures Trading Commission

No-Action Relief

CFTC Issues No-Action Relief for Swap Dealers Operating in the EU

On February 1st, the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued a no-action letter stating that, from February 4, 2017 to May 8, 2017, it will not recommend an enforcement action against a swap dealer that is subject to, and in compliance with, the margin requirements for non-centrally cleared OTC derivatives in the EU for failure to comply with the agency’s final margin rule. CFTC Press Release.

CFTC Grants Exemptive Relief from the Requirement to Obtain Participant Waivers to Provide Unaudited Financial Statements when Liquidating a Series of an RIC

On January 26th, the DSIO responded to inquires requesting clarification of how Regulation 4.22(c) relates to certain financial reporting obligations of a commodity pool operator of a commodity pool that is also registered with the SEC as a registered investment company (“RIC”).     

Other Developments

Amir Zaidi Announced as Director of the Division of Market Oversight

On January 27th, CFTC Acting Chairman J. Christopher Giancarlo announced that he has appointed Amir Zaidi to lead the Division of Market Oversight (“DMO”). The Acting Chairman also appointed Vincent McGonagle as the Acting Director for the Division of Enforcement. In addition, Jeffrey Bandman will step down from his role as Acting Director of the Division of Clearing and Risk (“DCR”) to become an advisor on issues related to Financial Technology; John Lawton has taken over as Acting Director of DCR.

Federal Rules Effective Dates

February 2017 – April 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

CFE Proposes Rule Changes on the Front Running of Block Trades

On February 2nd, the SEC requested comments on a proposed rule change filed by CBOE Futures Exchange LLC (“CFE”) that would make changes to its rules relating to the front running of Block Trades by clarifying that no person may engage in the front running of a Block Trade when acting on material non-public information regarding an impending transaction by another person, acting on non-public information obtained through a confidential employee/employer relationship, broker/customer relationship, or in breach of a pre-existing duty.  Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 6, 2017. SEC Release No. 34-79931.

SEC Takes More Time to Consider CBOE’s Proposal on Open Outcry Priority and Allocation Requirements

On January 31st, the SEC designated March 19, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding the Chicago Board Options Exchange Incorporated’s (“CBOE”) proposed rule change regarding responsibilities for ensuring compliance with open outcry priority and allocation requirements and trade-through prohibitions. SEC Release 34-79910.

SEC Approves CBOE’s Proposal on Electronic Trading of Complex Orders

On January 30th, the SEC issued an order granting accelerated approval of CBOE’s amended proposal to modify its rules to provide for the electronic trading of complex orders consisting of series authorized for trading on the Hybrid 3.0 Platform and series authorized for trading on the Hybrid Trading System. SEC Release No. 34-79899.    

Financial Industry Regulatory Authority

FINRA Announces Updates to Electronic Blue Sheet Data Elements

In a Regulatory Notice published on February 1st, FINRA advised members that it and the other U.S. members of the Intermarket Surveillance Group have updated several data elements for Electronics Blue Sheets, including changes and additions to Requestor Codes, Exchange Codes, and Transaction Type Identifiers. The updates, which will become effective on February 6, 2017, respond to the SEC’s approval of MIAX PEARL as a national securities exchange.       

ICE Clear Credit

ICC Approved to Clear Additional CDS Contracts

On January 27th, the SEC approved ICE Clear Credit LLC’s (“ICC”) proposal to amend its rules to provide for the clearance of additional credit default swap (“CDS”) contracts, including Standard Australian Corporate Single Name CDS contracts and Standard Australian Financial Corporate Single Name CDS contracts. SEC Release No. 34-79892.     

International Securities Exchange

SEC Seeks Comments on ISE’s Proposed Changes to Its Opening Process

On January 27th, the SEC provided notice of a proposed rule change filed by the International Securities Exchange LLC (“ISE”) that would amend its opening process in connection with a technology migration to the Nasdaq INET architecture. Comments should be submitted on or before February 23, 2017. SEC Release No. 34-79887.     

Investors Exchange

IEX Proposes Generic Listing Standards for Managed Fund Shares

On February 2nd, the SEC provided notice of a proposal filed by the Investors Exchange LLC (“IEX”) to adopt generic listing standards for Managed Fund Shares. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 6, 2017. SEC Release No. 34-79940.

SEC Takes Additional Time to Consider IEX’s Proposed Changes to Rules on Peg Orders

On January 26th, the SEC designated March 13, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding IEX’s proposal to modify the operation of the primary peg order type; change the price sliding process for both primary peg orders and discretionary peg orders resting on or posting to the order book; and make minor housekeeping changes to conform certain terminology. SEC Release No. 34-79883.     

Municipal Securities Rulemaking Board

MSRB Board Considers Rulemaking Initiatives at Quarterly Meeting

On January 30th, the Municipal Securities Rulemaking Board (“MSRB”) provided an overview of the initiatives discussed by its Board of Directors at its quarterly meeting, which took place on January 24-26, 2017. Among other things, the Board advanced a new rule on the content and accuracy of municipal advisor advertising; proposed updates to existing rules on dealer advertising; considered amendments to rules to establish continuing education requirements for municipal advisors; and proposed changes to its rules to codify the requirement that dealers must apply for CUSIP numbers when conducting private placements of municipal securities.    

National Futures Association

NFA to Close In-Office Registration Kiosks

On January 30th, the National Futures Association (“NFA”) notified members that, beginning on May 1, 2017, it will no longer offer kiosk services at its Chicago office for individuals to complete and file applications and updates in its Online Registration System.     

National Securities Clearing Corporation

SEC Approves NSCC’s Proposed Changes Related to the Consolidated Trade Summary

On January 31st, the SEC approved a proposed rule change filed by the National Securities Clearing Corporation (“NSCC”) that will amend its rules and procedures to reflect changes to the Consolidated Trade Summary (“CTSs”), which include providing more details in the revised CTSs, simplifying the terminology in the rules by referring to each iteration of the CTS as the “Consolidated Trade Summary,” and discontinuing the Foreign Securities transaction file. SEC Release No. 34-79904.

Judicial Developments

FINRA’s Disciplinary Sanction Remained ‘Live’ Based on $1000 Fine; Broker-Dealer’s Challenge to Sanction Therefore Subject to SEC Review

FINRA rejected broker-dealer Sharemaster’s annual report because it did not comply with SEC requirements, and ordered Sharemaster to pay a $1,785 in costs. The SEC dismissed Sharemaster’s application for review and the Ninth Circuit remanded on February 2nd for the SEC to decide whether it can direct FINRA to reinstate Sharemaster. The panel noted that the SEC unreasonably decided that FINRA’s disciplinary sanction was no longer “live,” adding that it actually remained live based on a $1000 fine and that Sharemaster’s challenge to FINRA’s final disciplinary sanction was, therefore, subject to SEC review. Sharemaster v. U.S. Securities & Exchange Commission.

Industry News

Former SEC Chair White Gives Interview

On January 30th, ThinkAdvisor published excerpts of its interview with outgoing SEC Chair Mary Jo White, in which she discussed the fiduciary rule she attempted to pass, advisor exams, her “broken windows” strategy in pursuing violations, and her thoughts on Trump's nominee to replace her.