Insights from Winston & Strawn 

Addressing Wall Street’s Concerns, U.S. Financial Regulators Discuss Volcker Rule.

U.S. financial regulators are tackling one of Wall Street’s biggest concerns by discussing the Volcker Rule. The Volcker Rule governs banks’ speculative trading by implementing a ban on certain types of trading activities. The rule was originally proposed by American economist and former United States Federal Reserve Chairman, Paul Volcker, to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers. Regulators adopted the Rule as a result of the 2010 Dodd-Frank financial overhaul. It aimed to reduce risks by simplifying bank structures to make them more transparent and to reduce the conflicts of interest that arise when divisions of a bank have different priorities. The Rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts.

Keith Noreika, Acting Comptroller of the Currency, expressed a belief that regulators need to do a better job of clarifying what trading activities are permitted under the Volcker Rule. It seeks to make banks mere facilitators of their clients’ trading activities. However, banks complain that the line between the approved and prohibited trading is not clear. Mr. Noreika recommended regulators catalogue types of transactions and investments, then evaluate whether to grant regulatory exemptions for each category to provide clarity. He stressed in a recent interview with the Wall Street Journal that “The ultimate problem with the Volcker rule is no one knows what prop trading is.”

The Federal Reserve also recognized problems with the Volcker Rule. In a speech, Daniel Tarullo, the Federal Reserve’s former point man for the Rule, stated the Rule covers more banks than it was intended to, imposing unnecessary costs on community banks which do not do speculative trading. Moreover, it has negatively impacted key sectors of the financial markets, such as corporate bonds, by frightening banks out of making markets due to the unclear regulatory line between making markets and speculating, consequently, making it more expensive for companies to raise money through the bond market. Finally, the Volcker Rule has proven legally impossible to enforce because it requires supervisors to guess what was going through bankers’ minds when they made particular trades.

While previously political analysts thought any change in the Volcker Rule would likely be part of a broader rewriting of Dodd-Frank, Mr. Noreika made clear his agency could take unilateral actions to reinterpreting the definition of proprietary trading. Rich Foster, senior vice president at the Financial Services Roundtable trade group, called this “a good sign that the [Trump] administration is taking a fresh look at something that has had negative impacts on our industry.”

Feature: Under Trump Administration, More Companies Are Challenging CFPB’s Enforcement Actions

In 2011, the Consumer Financial Protection Bureau (“CFPB”) was established by the Dodd-Frank Act in an effort to protect consumers from harmful practices by financial institutions.A new Republican-led bill seeks to overhaul or completely eliminate the CFPB’sindependence and significantly cut its ability to regulate.As a result of this bill, companies targeted by the watchdog agency are more frequently choosing to fight enforcement actions instead of settling.

The CFPB stated that seven, or one-third, of the 21 enforcement actions announced by the agency this year have been challenged. This is a change from last year, when only six of the 36 enforcement cases brought by the CFPB were challenged.

The Wall Street Journal reported that companies are responding to what they view as aggressive enforcement tactics from a besieged agency trying to assert its power. Other companies are reportedly hoping that the CFPB is more lenient towards them as soon as the agency is staffed with Trump-appointed officials.

Despite the apparent shakeup, the CFPB commented that it has no intention of changing its approach. Samuel Gilford, a CFPB spokesman, stated “[w]e remain focused on carrying out our mission, and we will take action where necessary to enforce the law and achieve relief for harmed consumers.”  Embattled CFBP Director Richard Cordray noted in an interview that, despite Republican legislation that would change the name of the CFPB to the Consumer Law Enforcement Agency (thereby dropping the words “financial” and “protection”), the bureau is keeping focused on its job of protecting consumers.

Banking Agency Developments


OCC Hosts Credit Risk and Operational Risk Workshops in Nashville

On May 11th, the Office of the Comptroller of the Currency (“OCC”) announced that it will host two workshops at the Inn at Opryland in Nashville, Tenn., June 20-21, for directors of national community banks and federal savings associations supervised by the OCC. The Credit Risk workshop on June 20th will focus on credit risk within the loan portfolio, such as identifying trends and recognizing problems. The workshop also covers the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change. The Operational Risk workshop on June 21st will focus on the key components of operational risk: people, processes and systems. The workshop also covers governance, third-party risk, vendor management, and cybersecurity.

Revised ‘Fiduciary Powers’ Booklet

On May 8th, the OCC issued the “Fiduciary Powers” booklet of the Comptroller’s Licensing Manual.

Revised ‘Public Notice and Comments’ Booklet

On May 8th, the OCC issued the “Public Notice and Comments” booklet of the Comptroller’s Licensing Manual.


CFPB Asks for Public Feedback on Ways to Bridge the Information Gap on Small Business Lending

On May 10th, the CFPB announced its launch of an inquiry into ways to gather and use new and existing information to identify the financing needs of small businesses, especially those owned by women and minorities. The Request for Information asks for public feedback to help the Bureau better understand how to bridge this information gap.

Securities and Exchange Commission

Speeches and Statements

Piwowar Offers Possible Regulatory Causes of IPO Market Decline

In opening remarks at the SEC-NYU Dialogue on Securities Market Regulation on May 10th, SEC Commissioner Michael S. Piwowar speculated about the regulatory causes of the reduction in the number of initial public offerings (“IPO”). Piwowar cited higher regulatory burdens imposed by the Sarbanes-Oxley Act, changes to the economics of market making caused by decimalization and Regulation NMS, and changes to the Section 12(g) shareholder threshold introduced by the Jumpstart Our Business Startups ("JOBS") Act as possibly contributing to the decline in IPOs.

Piwowar, Stein Deliver Remarks to NASAA Conference

SEC Commissioners Michael S. Piwowar and Kara M. Stein addressed the North American Securities Administrators Association (“NASAA”) Section 19(d) Conference on May 9th. Commissioner Piwowar discussed the need for the SEC and NASAA to work together to assess the effectiveness of new capital formation methods and address any concerns that may arise with these transactions, including fraud. Commissioner Stein emphasized the need for regulators to be adaptable to changing markets, to communicate and coordinate, and to make use of high-quality data and data analytics.

Investor Advocate Examines Demand Side of the IPO Market

SEC Investor Advocate Rick A. Fleming considered the role of the investor and the demand for IPOs in understanding the causes of the downturn in the IPO market in remarks at the NASAA 2017 Public Policy Conference on May 9th. 

Other Developments

Small and Emerging Companies Advisory Committee Meeting

The SEC’s Advisory Committee on Small and Emerging Companies met on May 10th to discuss the underwriting of small offerings and draft recommendations on secondary market liquidity for Regulation A, Tier 2 securities and the treatment of “finders” that assist companies in capital raising activities.  Jay Clayton addressed the Committee in his first remarks as SEC Chair, noting that facilitating capital-raising opportunities for all companies, including small businesses, is among his priorities for the SEC. See also remarks by SEC Commissioner Kara M. Stein.

Staff Announcements

The SEC announced on May 11th that it has appointed Lucas Moskowitz to serve as the SEC’s chief of staff. On May 9th, the SEC announced that William H. Hinman has been selected to serve as the new Director of the Division of Corporation Finance.

SEC Files Amicus Brief in Support of Whistleblower

On May 5th, the SEC submitted an amicus brief to the U.S. Court of Appeals for the Seventh Circuit in Neal R. Verfuerth v. Orion Energy Systems, Inc., a lawsuit brought by the former CEO of Orion who claimed that he was fired in retaliation for making claims to board members about ethical violations by the board of directors as well as other misconduct. The SEC maintained that its interpretation of the anti-retaliation protections under the Securities and Exchange Act, which extends those protections to individuals who report securities law violations internally regardless of whether they make a separate report to the SEC, is entitled to deference.

OIG Releases Semi-Annual Report on SEC’s Operations

On May 5th, the Office of the Inspector General (“OIG”) published its semiannual report to Congress on the work of the SEC during the period from October 1, 2016, through March 31, 2017. The report includes information regarding the audits, evaluations, investigations, and reviews the OIG has conducted of the SEC’s programs and operations during this time.

Commodity Futures Trading Commission

Proposed Rule on Duties of CCOs of SDs, MSPs, and FCMs

On May 8th, the Commodity Futures Trading Commission (“CFTC”) proposed amendments to its regulations regarding certain duties of chief compliance officers (“CCOs”) of swap dealers (“SDs”), major swap participants (“MSPs”), and futures commission merchants (“FCMs”). Comments on the proposal must be received by July 7, 2017.

Federal Rules Effective Dates

May 2017 – July 2017

Securities and Exchange Commission

July 1, 2017          Technical Amendments to Form ADV and Form ADV-W. 82 FR 21472.

May 30, 2017       Securities Transaction Settlement Cycle. 82 FR 15564.

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

SEC Delays Action on CBOE’s Proposed Changes to Rules on Complex Orders

On May 5th, the SEC designated June 22, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning the Chicago Board Options Exchange Inc.’s (“CBOE”) proposal to amend its rules on orders in open outcry to modify the ratios a complex order must meet to be considered eligible for complex order priority; to amend its rules to designate the order of priority for complex orders that trade in open outcry at the same net debit or credit price as another complex order; and to simplify the definitions of the complex order types that may be made available on a class-by-class basis. SEC Release No. 34-80609.

Financial Industry Regulatory Authority

FINRA Moves Forward with Proposals to Enhance Controls on High-Risk Brokers

The Financial Industry Regulatory Authority (“FINRA”) announced on May 11th that its Board of Governors approved FINRA’s proposals to strengthen controls on high-risk brokers by, among other things, requiring additional disclosure on BrokerCheck, expanding sanction guidelines to allow adjudicators to consider more severe sanctions when a broker’s disciplinary history includes additional types of past misconduct, and permitting hearing panels to restrict the activities of firms and individuals while a disciplinary matter is on appeal. FINRA plans to issue Regulatory Notices requesting comments on the proposals and clarifying firms’ existing supervisory obligations concerning any high-risk brokers they employ.

FINRA Offers Information about Rules Amended to Reflect Shortened Settlement Cycle

In a Regulatory Notice published on May 11th, FINRA provided an overview of the rules that will be amended to conform to the SEC’s rule amendments to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”). The amendments to FINRA’s rules, which the SEC approved in February, will become effective on September 5, 2017.

FINRA Proposes to Expedite List Selection in Arbitration.

On May 9th, the SEC requested comments on a proposed rule change filed by FINRA that would amend its rules on arbitration for both customer and industry disputes to provide that the Director of FINRA’s Office of Dispute Resolution will send the list or lists of arbitrators generated by the Neutral List Selection System to all parties at the same time, within approximately 30 days after the last answer is due, regardless of the parties’ agreement to extend any answer due date. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 15, 2017. SEC Release No. 34-80634.

ICE Clear

SEC Seeks Comments on ICE Clear Europe’s Proposal on Its CDS End-of-Day Price Discovery Policy

On May 9th, the SEC provided notice of a proposed rule change filed by ICE Clear Europe Limited (“ICE Clear Europe”) that would amend ICE Clear Europe’s CDS End-of-Day Price Discovery Policy to change the calculation of firm trade notional limits for single-name credit default swaps (“CDS”) contracts. The proposal would also amend ICE Clear Europe’s Price Submission Disciplinary Framework. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 15, 2017. SEC Release No. 34-80631.

Municipal Securities Rulemaking Board

MSRB Advises Municipal Advisors to Prepare to Comply with Series 50 Exam Requirement

In a Regulatory Notice published on May 8th, the Municipal Securities Rulemaking Board (“MSRB”) reminded municipal advisor firms that the deadline for individuals associated with their firms to pass the Municipal Advisor Representative Qualification Examination (“Series 50 exam”) is September 12, 2017. The MSRB also updated its frequently asked questions on the Series 50 exam to help municipal advisors in complying with the exam requirements.

MSRB Withdraws Proposal on Below-Minimum Denomination Transactions

On May 5th, the SEC announced that the MSRB has withdrawn its proposal to adopt a new rule  on transactions below the minimum denomination of an issue and to rescind a provision on minimum denominations from its rules on confirmation, clearance, settlement, and other uniform practice requirements with respect to transactions with customers. SEC Release No. 34-80610.


SEC Approves NYSE Exchanges’ Proposals on Sub-Dollar Cabinet Trades

On May 5th, the SEC granted accelerated approval to NYSE Arca Inc.’s (“NYSE Arca”) and NYSE MKT LLC’s (“NYSE MKT”) separately filed proposals to amend their respective rules to make permanent a program that allows cabinet trade transactions to take place in open outcry trading at prices of at least $0 but less than $1 per option contract.

Judicial Developments

Panel Overrules Ninth Circuit’s Falsity Pleading Standard as Irreconcilable with Omnicare

Pension fund plaintiff alleged that Align Technology violated securities laws by misleading investors about an acquisition. On May 5th, the Ninth Circuit affirmed dismissal for failure to adequately plead falsity or scienter. The panel held that the three standards for pleading falsity of opinion statements set forth in the U.S. Supreme Court’s Omnicare apply; plaintiff failed to sufficiently plead falsity under any of the Omnicare standards; and plaintiff failed to sufficiently plead scienter. The panel overruled the Ninth Circuit’s prior falsity pleading standard as “clearly irreconcilable” with OmnicareCity of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology Inc.

Industry News

Irish Economy Faces Significant Negative Hit from Brexit

According to an International Monetary Fund (“IMF”) report, the Irish economy faces a significant negative hit from Britain’s decision to leave the European Union. The IMF found that Ireland, whose economy has been the best performing in the EU for the last three years, is generally considered the most susceptible among the bloc’s 27 remaining members to Brexit due to its close trading links with its nearest neighbor. Reuters.

Lawyer Now Running OCC Spent His Career Protecting Banks

On May 11th, The New York Times reported that lawyer Keith A. Noreika, who last week was appointed to run the OCC, spent much of his career protecting the very banks he will now be in charge of regulating. Since the White House appointed Noreika on an acting basis as a “special government employee,” he does not need to sign President Trump’s ethics pledge.