Insights from Winston & Strawn

The most dramatic bank regulatory news last week was that the Republican National Committee 2016 platform was amended to include a plank calling for reinstatement of the Glass-Steagall Act. It has long been anticipated that the Democratic National Committee 2016 platform will include a similar plank, albeit calling for an “updated and modernized version” of the Glass-Steagall Act. The fact that both major party platforms will call for reinstatement of a form of Glass-Steagall may cause bank regulatory counsel to sit up and take note of a potential coalition that could dramatically affect how banks are regulated.

For those who have been involved in bank regulation for less than the last 17 years, the Glass-Steagall Act was a Depression-era 1933 statute that was intended to separate commercial banking from investment banking and did so by, among other things, banning interlocks and affiliations between banks and securities firms. Those prohibitions were repealed by the Gramm-Leach-Bliley “financial modernization” Act (“GLBA”) in 1999.

There is disagreement as to whether repeal of Glass-Steagall contributed to the financial crisis experienced in 2008 or, on the other hand, helped manage it.

The American Bankers Association in 2010 published a paper arguing that GLBA did not cause the financial crisis. The paper explained that GLBA had nothing to do with subprime mortgages, mortgage underwriting, mortgage securitization, the failure of non-bank mortgage lenders, the bailout of FNMA or FHLMC, AIG, Bear Stearns, or Lehman Brothers, or their investment and liquidity decisions. The paper further suggested that by eliminating the separation between commercial banking and investment banking, GLBA enabled financial firms to diversify their income streams, providing a buffer against loan losses. The paper also makes the point that GLBA enabled an orderly resolution of troubled investment banks by banking organizations subject to robust regulation, strong leverage-reducing capital requirements, on-site examinations, and restrictions on activities.

U.S. Senators John McCain (R-AZ) and Elizabeth Warren (D-MA) have co-authored a bill that would reinstate Glass-Steagall, but until now the idea did not appear likely to have wide support. Nonetheless, some say that reinstatement of Glass-Steagall is consistent with increasing political support for populist notions.

Feature: Companies That Follow DOJ’s Pilot FCPA Program May See Benefits of Self-Reporting, Self-Disclosing

On July 19th, Compliance Week mapped out how companies that follow the requirements of the U.S. Department of Justice’s (“DOJ”) Pilot Program, the “Foreign Corrupt Practices Act Enforcement Plan and Guidance,” will benefit from self-disclosing and self-reporting their FCPA violations. The new approach to FCPA enforcement started with the DOJ’s September 2015 “Yates Memo,” which required companies, in exchange for cooperation credit, to self-disclose and turn over information on individuals who may have been involved in behavior that violated the FCPA.

There are several times in which this new approach to FCPA enforcement has already been put into practice. In June 2016, the SEC announced non-prosecution agreements (“NPAs”) with two unrelated companies regarding ill-gotten gains connected to bribes paid to Chinese officials by foreign subsidiaries. Akamai Technologies Inc. and Nortek Inc. self-reported and admitted to their FCPA violations, cooperated extensively during their investigations, and comprehensively remediated their compliance programs during the investigations. In addition, Akamai agreed to profit disgorgement in the amount of $652,452 and Nortek agreed to profit disgorgement in the amount of $291,403. Daniel Kahn, the new deputy chief of the DOJ’s Criminal Division Fraud Section and head of the FCPA Unit, issued letters to both companies, declining to prosecute them for their admitted FCPA violations and cooperation and noting the reasons why the agency abstained from prosecution. The following significant influences for non-prosecution were listed as follows:

  1. Even before finishing its internal investigation, Nortek self-disclosed and swiftly self-reported its initial conclusions to the SEC and the DOJ, while Akamai also self-reported its actions in a timely manner and conducted a quick and exhaustive investigation.
  2. Both Nortek and Akamai cooperated to the fullest extent during their investigations.
  3. Both companies thoroughly amended their compliance programs during the investigations and both companies terminated employees who were allegedly involved in the offending conduct.
  4. Nortek and Akamai disgorged the profits they apparently received as a result of the offending conduct, although it was unclear how the amounts were calculated or upon which transactions the profit disgorgements were based.

Andrew Ceresney, Director of the SEC Enforcement Division, commented that “[w]hen companies self-report and lay all their cards on the table, non-prosecution agreements are an effective way to get the money back and save the government substantial time and resources while crediting extensive cooperation.”

Conversely, later in June, C-Suite executives of Analogic Corp.’s Danish subsidiary, BK Medical, allegedlyengaged in hundreds of fake transactions with distributors so that the distributors could funnel approximately $20 million to third parties, including several offshore shell companies. Following self-disclosure, extensive remediation, and profit disgorgement, the company received partial cooperation credit pursuant to an NPA that levied a fine on BK Medical that was 30% below the minimum suggested by the U.S. Sentencing Guidelines. The discount was only 30%, as BK Medical was particularly found not to have engaged in extensive cooperation. The NPA stated that BK Medical “did not receive full cooperation credit because … [its] cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts that it learned during the course of its internal investigation; specifically, the company did not disclose information that was known to the company and Analogic about the identities of a number of the state-owned entity end-users of the company’s products, and about certain statements given by employees in the course of the internal investigation.”

As noted in the Yates Memo, while seeking individual culpability for corporate wrongdoing may present challenges, the DOJ implemented cooperation credit in an effort to maximize the agency’s ability to deter future illegal activity, incentivize changes in corporate behavior, ensure that the proper parties are held responsible for their actions, and promote the public's confidence in the justice system.

Banking Agency Developments


Agencies Issue Proposal on Method to Adjust Threshold for Exempting Small Loans from Special Appraisal Requirements

On July 22nd, the Consumer Financial Protection Bureau (“CFPB”), the Federal Reserve Board, and the Office of the Comptroller of the Currency (“OCC”) announced a proposal detailing the method that will be used to make annual inflation adjustments to the threshold for exempting small loans from higher-priced mortgage loan appraisal requirements. The calculation method proposed would allow the thresholds to keep pace with the Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”). Among other clarifications, the proposal details that if there is no annual percentage increase in the CPI-W, the agencies will not adjust the exemption threshold from the prior year. Comments will be due 30 days after the rule is published in the Federal Register, which is expected shortly.

Federal Reserve, CFPB Issue Joint Proposal on Method to Adjust Thresholds for Exempting Certain Consumer Credit and Lease Transactions

On July 22nd, the Federal Reserve and the CFPB announced issuance of a proposal detailing the method that will be used to adjust the thresholds for exempting certain consumer credit and lease transactions from the Truth in Lending Act and Consumer Leasing Act. Among other clarifications, the proposal details that if there is no annual percentage increase in the CPI-W, the agencies will not adjust the exemption thresholds from the prior year. Comments will be due 30 days after the rule is published in the Federal Register, which is expected shortly.

Minority Depository Institutions Advisory Committee Charter Renewed

On July 22nd, the OCC announced its renewal of the charter of its Minority Depository Institutions Advisory Committee, which advises the agency on issues and opportunities facing minority depository institutions.

Federal Reserve

Federal Reserve Board Announces Adoption of Changes to Part II of the Federal Reserve Policy on Payment System Risk

On July 21st, the Board announced the adoption of changes to part II of the Federal Reserve Policy on Payment System Risk (“PSR”) to conform with enhancements to the Reserve Banks’ same-day automated clearing house (“ACH”) service previously announced by the Board on September 23, 2015. The Board adopted a second posting time for forward same-day ACH transactions at 1pm EST to supplement the current 5pm EST posting time for forward same-day ACH transactions. In addition, the Board established that all returns of future-dated and same-day ACH transactions will post at the next available posting time or following the settlement of the associated forward transactions. The PSR policy changes become effective September 23, 2016, concurrent with the Reserve Banks’ enhanced same-day ACH service. Federal Register Notice.


CFPB Requests Comments for Proposed Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans

In June, the CFPB announced a proposed rule that would require lenders to determine whether borrowers can afford to pay back their loans. The proposed rule would also cut off repeated debit attempts that rack up fees and make it harder for consumers to get out of debt. These strong proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment loans. On July 21st, the CFPB announced that the deadline for submitting comments on the proposed rule is October 7, 2016. The CFPB also announced an inquiry into other potentially high-risk loan products and practices that are not specifically covered by the proposed rule. The deadline for submitting comments on the Request for Informationis November 7, 2016.

CFPB Announces Changes to Senior Leadership

On July 20th, the CFPB announced leadership changes, which include Chris D’Angelo, who will serve as the CFPB’s Associate Director for Supervision, Enforcement and Fair Lending; Richard Lepley, who will serve as the CFPB’s Principal Deputy General Counsel in the Office of the General Counsel in the Legal Division; and Nellisha Ramdass, who will serve as the CFPB’s Deputy Chief Operating Officer.

Treasury Department Developments


FinCEN Releases FAQs on Customer Due Diligence Requirements for Financial Institutions

On July 19th, the Financial Crimes Enforcement Network (“FinCEN”) published frequently asked questions regarding customer due diligence requirements for financial institutions.

Securities and Exchange Commission

Staff Announcements

Wesley R. Bricker will serve as the SEC’s Interim Chief Accountant, according to an announcement on July 21st. The SEC appointed Bricker to serve in the role while current Chief Accountant James V. Schnurr recovers from a serious bicycle accident. On July 20th, the SEC announced that Kurt L. Gottschall will serve as Associate Regional Director for enforcement in the SEC’s Denver Regional Office.

Advisory Committee on Small and Emerging Companies Meeting

The SEC’s Advisory Committee on Small and Emerging Companies met on July 19th to discuss Regulation A+ and the accredited investor definition. In her opening remarks to the Committee, SEC Chair Mary Jo White provided an update on Regulation A+ and Regulation Crowdfunding, noting that the SEC has approved 50 of the over 100 Regulation A+ offering statements filed with the Commission. Chair White also noted that 60 offerings have been made under the crowdfunding exemption since Regulation Crowdfunding became effective in May. The Committee recommended that the SEC retain the current financial thresholds for the accredited investor definition, but consider expanding the definition to take into account measures of non-financial sophistication to expand the pool of accredited investors.

OCR Clarifies Timeline for Reviewing Credit Ratings of Issuers Employing Former NRSRO Employees for Possible Conflicts of Interest

On July 18th, the SEC released a letter sent by the Office of Credit Ratings (“OCR”) to designated compliance officers at nationally recognized statistical rating organizations (“NRSROs”) reminding them of their obligations under the Securities Exchange Act to review and revise any credit rating determinations for issuers or instruments that employ former employees of the NRSRO. In the letter, the OCR explained that in defining the one-year period preceding the date an action was taken with respect to the credit rating, the OCR would consider the relevant “action” to be the most recent rating action taken by the NRSRO prior to the employee’s departure.

Commodity Futures Trading Commission

Staff Prepares Guidance to DCOs on Recovery Plans, Wind-Down Plans

On July 21st, Staff of the U.S. Commodity Futures Trading Commission’s (“CFTC”) Division of Clearing and Risk issued guidance to Derivatives Clearing Organizations (“DCOs”) in order to assist them in revising and improving their Recovery Plans and Wind-down Plans, and in preparing proposed rule submissions to implement their Recovery Plans and Wind-down Plans. CFTC Press Release.

Federal Rules Effective Dates

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Exchanges and Self-Regulatory Organizations

Depository Trust Company 

SEC Takes More Time to Consider DTC’s Proposed Rules for Imposing Deposit Chills and Global Locks

On July 21st, the SEC designated September 7, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding the Depository Trust Company’s (“DTC”) proposed rule amendments that would establish the circumstances under which it would impose and release a restriction on Deposits of an Eligible Security (“Deposit Chill”) or on book-entry services for an Eligible Security (“Global Lock”), as well as the procedures for issuers to challenge the Deposit Chill or Global Lock. SEC Release No. 34-78379.

SEC Approves DTC’s Proposed Link with Euroclear

On July 19th, the SEC approved proposed rule amendments filed by DTC to establish a link between DTC and Euroclear Bank SA/NV for collateral positioning participants to use securities held at DTC for Euroclear Bank collateral transactions. SEC Release No. 34-78358.

Financial Industry Regulatory Authority

FINRA Proposes Expansion of TRACE Reporting to U.S. Treasury Securities

On July 19th, the SEC requested comments on the Financial Industry Regulatory Authority’s (“FINRA”) proposal to expand the Trade Reporting and Compliance Engine (“TRACE”) reporting rules to include most secondary market transactions in marketable U.S. Treasury securities, with the exception of savings bonds. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of July 25, 2016. SEC Release No. 34-78359.

FINRA Board of Governors Elects New Chair, Considers Rulemaking Items at Meeting

On July 15th, FINRA issued an update on the actions taken by its Board of Governors at its recent meeting. Among other things, the Board of Governors elected Jack Brennan to serve as FINRA’s Chairman and authorized FINRA to propose rule amendments relating to the use of its Alternative Display Facility by member firms for trade reporting purposes, a safe harbor for desk commentary from specified debt and equity research rules, and the expansion of TRACE reporting to U.S. Treasury securities. FINRA Press Release.

Fixed Income Clearing Corporation

FICC Proposes Margin Charge Increase For GCF Repo Participants Using Mortgage-Backed Securities for Collateral

On July 15th, the SEC provided notice of a proposed rule change filed by the Fixed Income Clearing Corporation (“FICC”) that would amend the Government Securities Division Rulebook to include a margin charge increase that may be imposed on Netting Members who participate in the GCF Repo service and whose portfolios experience back-testing deficiencies due to the use of mortgage-backed securities as collateral. Comments should be submitted on or before August 11, 2016. SEC Release No. 34-78347.

International Swaps and Derivatives Association

ISDA Examines Effect of Clearing and Compression on Interest Rate Derivatives

On July 21st, the International Swaps and Derivatives Association (“ISDA”) published Derivatives Market Analysis: Interest Rate Derivatives, a research note that analyzes the impact of clearing and compression on the interest rate derivatives notional outstanding data reported by the Bank for International Settlements (“BIS”). ISDA’s analysis found that the overall interest rate derivatives notational has been reduced by approximately 67 percent as a result of portfolio compression. ISDA Research Note.


SEC Institutes Disapproval Proceedings Regarding NYSE Exchanges’ Proposed Fees for Co-Location End Users

On July 21st, the SEC instituted disapproval proceedings regarding the New York Stock Exchange LLC’s(“NYSE) and NYSE MKT LLC’s (“NYSE MKT”) separately filed proposals to amend their respective price lists and fee schedules to establish fees relating to end users of certain co-location users in the exchanges’ data centers and to amend the definition of “Affiliate.” Comments should be submitted within 21 days of publication in the Federal Register. Rebuttal comments are due within 35 days. The SEC also requested comments on the exchanges’ amendments to their proposals, which should also be submitted within 21 days of publication in the Federal Register.

NYSE Exchanges Withdraw Proposed Changes to Pre-Opening Indications and Opening Procedures

On July 20th, the SEC provided notice that the NYSE and NYSE MKT withdrew their separately filed proposals to amend their respective rules relating to pre-opening indications and opening procedures that would have amended the definition of “block” and the size of a proposed cross transaction eligible for the cross function.

NYSE MKT Proposes Changes to FLEX Options Terms

On July 15th, the SEC requested comments on a proposed rule change filed by NYSE MKT that would amend certain rules related to FLEX Options to offer new alternative terms for FLEX Options and to update rule text to more accurately reflect trading in FLEX Options on the exchange. Among other things, the proposal would allow market participants to trade FLEX Options contracts in Binary Return Derivatives, permit parties to designate additional settlement styles, and modify how exercise prices and premiums for FLEX Options may be expressed. Comments should be submitted on or before August 11, 2016. SEC Release No. 34-78348.

Judicial Developments

Securities Fraud Plaintiffs Fail to Show That Deloitte Knew About Red Flags in Crocs’ Inventory System

Plaintiffs filed a securities fraud class action against shoe manufacturer Crocs and auditor Deloitte & Touche, alleging that Deloitte knew about or recklessly disregarded red flags including Crocs’ archaic, error-prone system for keeping track of its inventory. The Tenth Circuit affirmed dismissal on July 19th, holding that plaintiffs failed to establish a strong inference that Deloitte acted recklessly, as they failed to show that Deloitte knew about the red flags or that the warning signs were so obviously indicative of fraud that Deloitte’s failure to see them as such constituted willful blindness. Crocs.

Industry News

G-20 Is Ready to Deal with Brexit’s Economic Fallout

G-20 plans to say at a meeting of finance chiefs this weekend in Chengdu, China that it is capable of dealing with the economic fallout of Britain’s vote to leave the European Union. On July 22nd, Bloomberg reported that,according to a draft communique being discussed by deputies ahead of the meeting, “[m]embers of the G-20 are well positioned to proactively address the potential economic and financial consequences stemming from the U.K. referendum.” G-20, which is likely to reiterate its pledges to consult closely on currency markets and to refrain from protectionist measures, also plans to stress the necessity for an “open and resilient financial system” in light of recent instability in financial markets.