Insights from Winston & Strawn 

As companies continue to strengthen their social media outreach efforts, we often have to remind clients that securities laws and financial industry regulation apply equally to web-based and social media marketing. Last week, the Financial Industry Regulatory Authority (“FINRA”) issued a reminder of its own in the form of a Regulatory Notice providing further guidance on the application of its rules governing communications with the public to social media sites and the use of smartphones and similar technologies for business communications.

Firms are encouraged first to pay close attention to recordkeeping requirements.  As FINRA notes, whether a communication must be retained depends on its content and not upon the type of device or technology used to transmit the communication.  This may go without saying for blog posts and other basic communications, but keep in mind that recordkeeping requirements extend to any communication with regard to a FINRA-regulated person’s business, even by text messaging app or other chat service.  Additionally, firms are urged to use caution in sharing or linking to specific content, as a firm will be considered to have adopted any content in the linked or shared materials and will be responsible for ensuring that, when read in context with the statements in the originating post, the linked content complies with the same standards (e.g., no misleading or inaccurate statements) as communications created by, or on behalf of, the firm.  In certain instances, a firm could even be responsible for the content of links found on the linked page itself.  And finally, although firms will not necessarily be responsible for unsolicited third-party opinions or comments posted on their social network sites, a firm could be considered to have adopted favorable comments by liking or sharing them.  This would make any such comments subject to FINRA’s full communications rules, including the prohibition on misleading or incomplete statements or claims, testimonial requirements and supervision and recordkeeping rules.  So remember—you may be putting your firm’s stamp of approval on anything you like or share.

House Financial Services Committee Hearing on the Financial CHOICE Act

On April 26th, members of the House Financial Services Committee held a hearing on the GOP’s proposal to replace the 2010 Dodd-Frank Act with a bank deregulation bill, the Financial CHOICE (“Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs”) Act (the “bill”), a piece of legislation that was drafted by committee chairman Jeb Hensarling. According to CNN Money, this will probably be the only hearing on this proposal while, in contrast, Congress held 41 hearings when drafting Dodd-Frank. Democratic members of the committee opposed to the bill petitioned the Committee to have their own hearing before a planned May 2nd vote and an expected full House vote later in May. Rep. Maxine Waters, D-Calif., the top Democrat on the Committee, submitted a letter during the hearing signed by each Democratic committee member calling for an additional hearing on the bill before the vote.

According to The Bond Buyer, one item that is garnering much debate is the anticipated repeal of Dodd-Frank’s Durbin Amendment, which limits the fees that credit card companies can charge retailers. The discussion over repealing this amendment is causing a clash between banks and retailers. Sources are saying that such a provision could affect Republicans’ decisions about whether to support the bill in the House.

TheStreet reported on another, less widely known portion of the bill, which is backed by Republicans. This provision, a reform that would end a major shareholder tool used by investors to increase transparency and disclosure of information, would make it difficult for activist shareholders to submit proposals for consideration at U.S. corporations. Under the bill, activist shareholders looking to submit proposals at publicly traded U.S. corporations must possess 1% of their target company’s shares for three years. According to The Huffington Post, only the largest investors would therefore be able to file a shareholder resolution. This is in contrast to the current system, which allows shareholders to submit a proposal when they own $2000 in shares for one year. If passed, the bill would prevent a wide range of shareholders from submitting hundreds of proposals per year for consideration on a wide variety of subjects, which have included the removal of anti-takeover protections and measures advising big banks to break up or companies to be mindful of environmental policy issues.

Rep. Randy Hultgren, R-Ill., referred to the current proposal system as a loophole that some people have taken advantage of in order to force corporations to spend an “unconscionable” amount of time on items that he deems to be typically overlooked. In an interview outside the April 26th Committee hearing, Hultgren said that “[t]he social objectives in these proposals have nothing to do with investor protection or capital protection.” He added that it “[s]eems like the whole intent is to take away time and distract companies from doing what they are supposed to be doing. We need some relief.”

After the hearing, Hester Peirce, a senior fellow at George Mason University’s Mercatus Center, maintained that the current proposal system is a huge burden on the Securities and Exchange Commission (“SEC”) and is a substantial cost on companies. Peirce stated that “[t]he SEC is spending lots of resources on shareholder proposals and companies are spending lots of resources on them,” adding that “[t]his isn't really achieving what shareholders of companies really want. It's expensive.” She imagines that, with the 1% stake prerequisite, there would still be shareholder advocates, but that they would mainly consist of large investors.

Shareholder advocates, however, claimed that the bill would practically eradicate the proposals. Activist shareholder proposal advocate James McRitchie argued that “[i]f the bill is enacted as currently written, there will be 99% fewer shareholders proposals.” According to McRitchie, the proposals have had a tangible effect on making corporations more accountable to shareholders by forcing businesses to dispose of classified boards, permit majority voting, and put in independent directors. McRitchie contended that “[t]here were proposals on subprime loans that came out seven years before the crisis … [i]f you don't have this mechanism to hear from shareholders you are going to be caught off guard.” McRitchie concluded that the current $2000 limit was originally set up in order to empower retail investors, thereby giving them a voice in corporate affairs.

Also under the bill, thresholds for when shareholders can resubmit shareholder proposals would be raised, and the commonly used practice of shareholder advocates having an agent assist them would be scrapped entirely.

Finally, the bill contains a proxy fight provision that would eliminate the SEC’s proposed “universal proxy card” which, if adopted by the SEC, would give shareholders more flexibility to choose among dissident director candidates and incumbent board members involved in a proxy fight.

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


Comptroller Discusses the Future of Finance and Responsible Innovation

On April 28th, Comptroller of the Currency Thomas J. Curry discussed the state of financial innovation and its potential to improve the lives of ordinary Americans and the bottom lines of businesses. During the remarks at an event sponsored by Northwestern University’s Kellogg School of Management, the Comptroller also highlighted what the Office of the Comptroller of the Currency (“OCC”) is doing to encourage responsible innovation within the federal banking system.

OCC to Host Risk Governance and Compliance Workshops in Oklahoma

On April 27th, the OCC announced that it will host two workshops in Oklahoma City at the Aloft Oklahoma City Downtown-Bricktown, from June 6th to June 7th, for directors of national community banks and federal savings associations supervised by the OCC. The June 6th Risk Governance workshop will provide practical information for directors to effectively measure and manage risks, and will focus on the OCC’s approach to risk-based supervision and major risks in the financial industry. The June 7th Compliance Risk workshop will focus on the critical elements of an effective compliance risk management program, as well as on major compliance risks and critical regulations. Topics of discussion will include the Bank Secrecy Act, Flood Disaster Protection Act, Fair Lending, Home Mortgage Disclosure Act, and the Community Reinvestment Act.

OCC to Host Mutual Savings Association Advisory Committee Meeting

The OCC announced that it will host a public meeting of the Mutual Savings Association Advisory Committee on Tuesday, May 9, 2017, beginning at 8:30 a.m. Eastern Daylight Time. The purpose of the meeting is to advise the OCC on regulatory changes or other steps the OCC may be able to take to ensure the continued health and viability of mutual savings associations and other issues of concern to mutual savings associations. Federal Register Notice.


CFPB Supervision Finds Some Student Loan and Mortgage Servicers Illegally Fail to Provide Protections to Borrowers

On April 26th the Consumer Financial Protection Bureau (“CFPB”) announced that its recent supervisory work has found that some student loan and mortgage servicers are violating the law by failing to provide struggling borrowers with legal protections. CFPB examiners found that some student loan servicers failed to refund charges imposed on borrowers who had been wrongly denied the right to defer payments while enrolled in school. The report also found that some mortgage servicers did not deliver the required foreclosure protections to borrowers seeking to save their homes, mishandled escrow accounts, and sent incomplete bills.

Treasury Department Developments

Statement by the Secretary of the Treasury

On April 27th, Secretary of the Treasury Steven T. Mnuchin released a statement on the Financial CHOICE Act.  As part of that statement, he claimed that “[t]he existing regulatory system is limiting, not stimulating our economy.”

Securities and Exchange Commission

No-Action Relief and Exemptive Orders

SEC Grants Application to Exchanges for Conditional Exemption from Certain Requirements of Rule 6a-2 under the Exchange Act

On April 27th, the SEC granted the application of New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc., and NYSE National, Inc., (“Exchanges”) for a conditional exemption pursuant to Section 36(a) of the Exchange Act from certain requirements of Rule 6a-2 under the Exchange Act, as appropriate in the public interest and consistent with the protection of investors. Release No. 34-80536.     


Amendment to Securities Transaction Settlement Cycle – A Small Entity Compliance Guide

On April 21st, the SEC’s Division of Trading and Markets prepared Amendment to Securities Transaction Settlement Cycle – A Small Entity Compliance Guide, which summarizes and explains the agency’s amendment to Rule 15c6-1(a) under the Exchange Act.     

Speeches and Statements

Piwowar Thinks SEC Should Develop Its Own Fiduciary Rule

In remarks at a conference sponsored by the Mutual Fund Directors Forum on April 21st, Acting SEC Chair Michael S. Piwowar said that the SEC should write its own version of a rule establishing standards for brokers providing advice to retail investors to replace the Department of Labor’s (“DOL”) fiduciary rule, according to a report in the Wall Street Journal. The Trump administration has delayed implementing the DOL’s version of the rule while it considers changing or possibly eliminating the measure.     

Other Developments

Small and Emerging Companies Advisory Committee Will Hold Public Meeting

The SEC announced that its Advisory Committee on Small and Emerging Companies will meet on May 10, 2017, to discuss matters relating to rules and regulations affecting small and emerging companies under the federal securities laws. Written statements should be submitted to the Committee on or before May 8, 2017.

Whistleblower Who Provided Detailed Information and Expertise Awarded Almost $4 Million

The SEC announced on April 25th that it has awarded approximately $4 million to a whistleblower for alerting the SEC about serious misconduct as well as providing detailed information and ongoing assistance during the investigation, including specialized knowledge and expertise. The SEC noted that it has now awarded around $153 million to 43 whistleblowers under its whistleblower program.

Investment Management Updates Money Market Fund Statistics

The SEC’s Division of Investment Management published updated money market fund statistics on April 20th. The updated statistics include data as of March 31, 2017.

Federal Rules Effective Dates

May 2017 – July 2017

Securities and Exchange Commission

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

Exchanges and Self-Regulatory Organizations

Financial Industry Regulatory Authority

FINRA Publishes New Guidance on Social Networking Websites and Business Communications

In a Regulatory Notice published on April 25th, FINRA offered updated guidance on the application of its rules on communications with the public to digital communications, including social media sites and business communications, to reflect emerging technologies and communications innovations. The Notice includes questions and answers on text messaging, personal communications, hyperlinks and sharing, and native advertising, among other topics.     

Fixed Income Clearing Corporation

SEC Takes More Time to Consider FICC’s Capped Contingency Liquidity Facility

On April 25th, the SEC designated June 18, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning the Fixed Income Clearing Corporation’s (“FICC”) proposal to implement a Capped Contingency Liquidity Facility in FICC’s Government Securities Division Rulebook. SEC Release No. 34-80524.

FICC Proposes Changes to Clearing Rules on Mortgage-Backed Securities

On April 24th, the SEC requested comments on a proposed rule change filed by FICC that would modify FICC’s Mortgage-Backed Securities Division (“MBSD”) Clearing Rules by eliminating language that would potentially limit FICC’s access to MBSD Clearing Fund cash and collateral to address losses, liabilities, or temporary needs for funds incident to its clearance and settlement business. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 1, 2017. SEC Release No. 34-80517.     

ICE Clear Credit

SEC Designates Longer Period to Consider ICC’s New Price Submission Process

On April 21st, the SEC designated June 7, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding a proposed rule change filed by ICE Clear Credit LLC (“ICC”) that would amend ICC’s End-of-Day Price Discovery Policies and Procedures to implement a new price submission process for Clearing Participants. SEC Release No. 34-80506.     

Investors Exchange

SEC Accelerates Approval of IEX’s Amended Proposal on Generic Listing Standards for Managed Fund Shares

On April 27th, the SEC issued an order accelerating approval of the Investors Exchange LLC’s (“IEX”) proposal to adopt generic listing standards for Managed Fund Shares. The SEC also requested comments on an amendment to the proposal, which would add certain continued listing requirements for Managed Fund Shares based on those adopted by the Nasdaq Stock Market LLC and make technical changes to the requirements in its rules regarding firewalls and written surveillance procedures. Comments on the amended proposal should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 1, 2017. SEC Release No. 34-80545.

IEX Proposes Modified Opening Process for Non-IEX Listed Securities

On April 24th, the SEC requested comments on a proposed rule change filed by IEX that would modify the manner in which IEX opens trading for non-IEX listed securities beginning at the start of Regular Market Hours and specify the order types eligible to participate in the proposed Regular Market Session Opening Process for non-IEX listed securities. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of May 1, 2017. SEC Release No. 34-80514.     


NYSE MKT Amends Proposal on Unlisted Trading Privileges and ETP Listing Requirements

On April 21st, the SEC requested comments on NYSE MKT LLC’s (“NYSE MKT”) amendment to its proposal to allow NYSE MKT to trade pursuant to unlisted trading privileges (“UTP”) any NMS Stock listed on another national securities exchange; establish listing and trading requirements for exchange-traded products (“ETPs”); and adopt new equity trading rules relating to trading halts for securities traded pursuant to UTP on the its new trading platform, Pillar. Comments on the amendment should be submitted on or before May 12, 2017. SEC Release No. 34-80500.

Industry News

How Trump and Brexit Could Change Global Bank Rules

On April 28th, Bloomberg Businessweek speculated as to how global bank rules could change as a result of Brexit and President Trump’s promise to roll back the financial regulations passed after the 2008 crisis. In London, Prime Minister Theresa May, headed for a possible departure of bankers as Britain quits the EU, has stated that she might fight “punitive” trade measures from the EU with tax cuts or policy changes to attract investors and companies. In addition, some EU member states could consider relaxed rules to lure London-based firms. Also, in Brussels, Europe’s top regulators are aiming to soften the latest round of international banking standards.    

Trump’s SEC Chair Pick Is Assembling Top Staff Members

On April 25th, The Wall Street Journal reported that Jay Clayton, President Trump’s pick as SEC chairman, is assembling a group of top staff members who have either spent their careers on Wall Street or advised companies on big deals, foreshadowing the agency’s likely switch to a deregulatory agenda.