Insights from Winston & Strawn

The Executive Orders recently passed by President Trump, directing the Secretary of the Treasury to consult with the heads of member agencies of the Financial Stability Oversight Council (see our Financial Services Update dated February 6, 2017) to determine whether existing laws and regulations promote six “core principles,” raise concern outside of the United States.

Given that one of the “core principles” is to advance American interests when negotiating international regulatory matters, many question whether the United States will try to free itself from the various initiatives stemming from the 2008-2009 G20 summits, which resulted in a comprehensive program of post-crisis financial reforms. These reforms were made up of four core elements: making financial institutions more resilient; ending too-big-to-fail; making derivatives markets safer; and transforming shadow banking into resilient market-based finance. While the main elements of the reforms have been agreed upon and their implementation is well underway, some policy work is still ongoing, particularly the work of the Basel Committee on Banking Supervision (BCBS) to finalize certain elements of the Basel III framework, as well as further work from the Financial Stability Board (FSB).

The FSB was created by the G20 in April 2009 with a view to promote global financial stability by coordinating the development of regulatory, supervisory, and other financial sector policies, as well as to monitor the implementation of the G20 reform programs. It brings together senior policy makers from various ministries of finance, central banks, and supervisory and regulatory authorities for the G20 countries, plus four other key financial centers—Hong Kong, Singapore, Spain, and Switzerland. Policies agreed by the FSB are not legally binding, nor are they intended to replace the normal national or regional regulatory framework. Instead, the FSB acts as a coordinating body to drive forward the policy agenda to strengthen financial stability.

The U.S. Secretary of the Treasury sits on the FSB and also chairs the Financial Stability Oversight Council (FSOC), which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), to identify risks to U.S.’s financial stability that could potentially arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.

As such, the FSOC acts as the connector to the FSB in the United States. The FSOC is also central to the FSB’s global regulation plan because no international regulatory scheme could function without including U.S. financial firms. Conversely, other countries will not accept the FSB regulations if U.S. firms are not similarly bound.  Any potential change in the implication of the FSOC in the works of the FSB, or in the role of the FSOC on the U.S. policy making process, could therefore potentially have adverse consequences on the implementation of—or even terminate—the G20’s post-crisis program.

Feature: Snap Inc.’s IPO Filing Raises Corporate Governance Questions 

On February 2nd, Snap Inc., the parent company of the vanishing image and messaging app Snapchat, made public its initial public offering (“IPO”) filing, which aims to raise as much as $3 billion and targets a $25 billion valuation for the tech start-up. As the Wall Street Journal pointed out, Snap’s much-anticipated offering is potentially the largest technology IPO to hit the market in the last two years, and could serve as a test case for other highly valued venture-backed companies, including Uber and Airbnb.

While market watchers dissected the financial information and growth metrics revealed in Snap’s Form S-1, one provision of the offering stood out in corporate governance circles: Snap’s decision to offer only non-voting shares to IPO investors. Snap admitted that its decision is “an unprecedented move in a U.S. IPO,” and the Wall Street Journal called the setup “extreme,” noting that while IPOs with multiple share classes giving a smaller percentage of voting shares to IPO investors are commonplace, those that divest shareholders of any voting rights are not. The article observed that multiple share classes are particularly attractive to tech companies because the structure gives them the freedom to innovate without interference from shareholders and can deter activist investors from launching a takeover bid. And, as one expert on private companies observed, Snap can leverage its position as the only tech IPO in a scarce market to dictate the terms of shareholders’ voting power.

Nonetheless, Snap’s decision raised eyebrows among some experts and investors. Writing for DealBook, University of California, Berkley, law professor Steven Davidoff Solomon called the offering “the most shareholder-unfriendly governance in an initial public offering, ever.” Institutional investors are also raising concerns. In a post on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Rob Kalb and Rob Yates of Institutional Shareholder Services (“ISS”) cited a 2016 ISS study that showed that controlled companies had weaker governance standards and tended to underperform “with respect to total shareholder returns, revenue growth, return on equity, and dividend payout ratios.” The Financial Times reported that the Council of Institutional Investors, a group representing pension funds and asset managers, sent a letter to Snap’s co-founders objecting to the share structure and asking them to reconsider. The Council’s executive director, Ken Bertsch, worried that Snap’s offering would “open the floodgates” for other exchanges around the world to remove their bans on dual-class listings.  

The revelation that Snap will offer only non-voting shares to IPO investors comes on the heels of a push by another group representing large investors to strengthen corporate governance standards. Just two days before Snap’s announcement, Pensions & Investments reported that the Investor Stewardship Group, a coalition of asset managers and public pension systems representing $17 trillion in assets, published a framework of corporate governance principles for U.S.-listed companies and investment stewardship for institutional asset owners and money managers. According to the Wall Street Journal, the coalition is calling for an end to dual-class shares in favor of a more equitable “one-share, one-vote standard.” Reuters speculated that the Snap IPO may test “the commitment of big asset managers in their recent fight for investor rights.”

Leading the charge in the fight for investor rights are the directors of corporate governance at these large institutional investors, positions that are largely held by women. The New York Times recently profiled several of these professionals, noting that corporate governance at institutional investors is “a rare corner in finance where women dominate.” The article notes that the approach of these women who work behind the scenes to encourage companies to extend greater rights to shareholders stands in contrast to the more “brash” tactics of activist investors. 

Banking Agency Developments


OCC Hosts Oklahoma Workshop for Bank Directors

On February 9th, the Office of the Comptroller of the Currency (“OCC”) announced that it will host a workshop in Tulsa, Okla., at the Renaissance Tulsa Hotel & Convention Center, March 27-29, for directors of national community banks and federal savings associations supervised by the OCC. The Building Blocks for Directors workshop, which will provide practical information on the roles and responsibilities of board participation for both new and experienced directors, will focus on directors’ duties and core responsibilities, discuss major laws and regulations, and increase familiarity with the examination process.   


FDIC Releases Economic Scenarios for 2017 Stress Testing

On February 6th, the FDIC announced its release of the economic scenarios that will be used by certain financial institutions with total consolidated assets of more than $10 billion for stress tests required under the Dodd-Frank Act.     

Federal Reserve

Daniel K. Tarullo Submits Resignation as a Member of the Board of Governors

On February 10th, the Board announced that Daniel K. Tarullo submitted his resignation as a member of the Board of Governors of the Federal Reserve System, effective on or around April 5, 2017. He has been a member of the Board since January 28, 2009.

Securities and Exchange Commission

SEC Renews Equity Market Structure Advisory Committee

In a commission notice published on February 9th, the SEC announced that it has approved the renewal of its Equity Market Structure Advisory Committee. The Committee will terminate six months from its date of renewal, unless the SEC chooses to renew the Committee prior to its expiration.     

SEC Reveals Agenda for Small and Emerging Companies Advisory Committee Meeting

On February 8th, the SEC announced the agenda for the next meeting of its Advisory Committee on Small and Emerging Companies, which will be held on February 15, 2017. Among other things, the Committee will consider secondary market liquidity for Regulation A companies and non-listed reporting companies; reasons why more companies may be choosing to stay private; recommendations on corporate board diversity; and suggestions on the treatment of so-called “finders” that assist companies in capital raising activities.     

OCIE Risk Alert Advises Investment Advisers of Top Five Compliance Topics in Examinations

In a Risk Alert published on February 7th, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) named the five compliance topics most frequently identified in deficiency letters sent by OCIE examiners to SEC-registered investment advisers. The top five frequent compliance topics include deficiencies involving the Custody Rule, the Compliance Rule, the Code of Ethics Rule, the Books and Records Rule, and regulatory filings, such as Form ADV, Form PF, and Form D.

Piwowar Asks for Public Input on Reconsideration of Pay Ratio Disclosure Rule

On February 6th, acting SEC Chair Michael S. Piwowar issued a statement requesting public comments on any unexpected challenges that issuers have experienced as they prepare to comply with the pay ratio disclosure rule and asking SEC staff to reconsider the implementation of the rule based on any comments submitted. Comments should be submitted within 45 days of Piwowar’s statement. 

DERA White Paper Examines Characteristics and Risk Indicators of Private Liquidity Funds

On February 6th, the SEC published a white paper prepared by staff in its Division of Economic and Risk Analysis (“DERA”) that uses data from Form PF to define the characteristics of private liquidity funds and compare them to money market mutual funds. The analysis found that most liquidity funds did not formally commit themselves to rule 2a-7 risk limits, although the vast majority of them held portfolios that were consistent with these limits.

Commodity Futures Trading Commission

DMO Provides No-Action Relief for Aggregation Notice Filings for Position Limits

On February 6th, the CFTC announced that its Division of Market Oversight (“DMO”) has issued a no-action letter stating that, from February 14, 2017 to August 14, 2017, it will not recommend an enforcement action for failure to file a notice when relying on certain aggregation exemptions from federal position limit levels.

Federal Rules Effective Dates

February 2017 – April 2017

Click here to view table. 

Chicago Stock Exchange

CHX Withdraws Proposed Liquidity Taking Access Delay

On February 7th, the SEC provided notice that the Chicago Stock Exchange, Inc. (“CHX”) has withdrawn its proposal to adopt the CHX Liquidity Taking Access Delay. SEC Release No. 34-79884.

Financial Industry Regulatory Authority

FINRA Seeks Comments on Changes to Rules on Communications with Public

On February 10th, the Financial Industry Regulatory Authority (“FINRA”) requested comments on proposed amendments to its rules governing communications with the public. The proposed changes would create an exception to the rule’s prohibition on projecting performance to permit a firm to distribute a customized hypothetical investment planning illustration that includes the projected performance of an asset allocation or other investment strategy, but not an individual security, subject to certain conditions. Comments should be submitted on or before March 27, 2017. FINRA Regulatory Notice 17-06.

FINRA Provides Update on Implementation of Dispute Resolution Task Force’s Recommendations

FINRA published a status report on February 8th that describes the progress it has made to date on the recommendations from the FINRA Dispute Resolution Task Force’s Final Report, which suggested improvements to FINRA’s arbitration and mediation forum. The report found that FINRA has taken action on 35 of the task force’s recommendations, while 16 are still pending, including a proposal to develop an intermediate form of adjudication for small claims. FINRA Press Release.

SEC Approves FINRA’s Proposals on Protections for Vulnerable Customers

On February 3rd, the SEC granted accelerated approval to a proposed rule change, as modified by a partial amendment, filed by FINRA that would require FINRA members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account and permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers, where there is a reasonable belief that these customers have been, are being, or will be subject to financial exploitation. SEC Release No. 34-79964.

Fixed Income Clearing Corporation

FICC Proposes New Minimum Volatility Calculation

On February 3rd, the SEC requested comments on the Fixed Income Clearing Corporation’s (“FICC”) proposal to amend its rules to include a minimum volatility calculation called the “Margin Proxy” that would be used in certain circumstances when determining a Netting Member’s daily VaR Charge and to modify the calculation of the Coverage Charge in circumstances where the Margin Proxy applies. Comments should be submitted on or before February 24, 2017. SEC Release No. 34-79958.

ICE Clear Credit

ICC Proposes Updates to Liquidity Thresholds for Euro Denominated Products

On February 8th, the SEC provided notice of a proposed rule change filed by ICE Clear Credit LLC (“ICC”) that would amend its clearing rules, the ICC Treasury Operations Policies and Procedures, and the ICC Liquidity Risk Management Framework to update ICC’s liquidity thresholds for Euro denominated products. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 13, 2017. SEC Release No. 34-79988.

International Securities Exchange

SEC Approves Changes to ISE Exchanges’ Rules to Permit Nasdaq Execution Services to Perform Routing Functions

On February 9th, the SEC approved the International Securities Exchange LLC’s (“ISE”), ISE Gemini LLC’s (“ISE Gemini”), and ISE Mercury LLC’s (“ISE Mercury”) separately filed proposals to amend their respective rules to permit Nasdaq Execution Services, LLC to become an affiliated Member of the exchanges to perform certain routing and other functions and to make other, related changes to the routing of orders, cancellation of orders, and handling of error positions.

International Swaps and Derivatives Association

ISDA Requests Regulatory Forbearance for Compliance with Variation Margin Regulations

In a letter to global regulators on February 7th, the International Swaps and Derivatives Association (“ISDA”), along with several other organizations, requested that all jurisdictions with a March 1, 2017, compliance date for regulations on the exchange of variation margin provide a transitional period during which market participants can continue to execute new derivatives transactions while they complete the necessary steps towards regulatory compliance for the relevant transactions.

Miami International Securities Exchange

MIAX PEARL Proposes Rule Changes Related to the Risk Protection Monitor for Certain Orders

On February 3rd, the SEC requested comments on MIAX PEARL LLC’s (“MIAX PEARL”) proposal to amend its rules on the Risk Protection Monitor for orders entered via the FIX Interface (“RPM-FIX”) to make the protections available to all Members of the exchange and to make their usage mandatory for Electronic Exchange Members (“EEMs”). MIAX PEARL also proposed to make similar amendments its rule on the Risk Protection Monitor for orders entered via the MEO Interface (“RPM-MEO”) and to make it mandatory for EEMs using MEO to use the available protections. Comments should be submitted on or before March 2, 2017. SEC Release No. 34-79959.

Municipal Securities Rulemaking Board

MSRB Announces Improvements to EMMA Alert Tools

The Municipal Securities Rulemaking Board (“MSRB”) announced on February 8th that it has enhanced the functionality of the automated alerts issued by its Electronic Municipal Market Access (“EMMA”) website. EMMA users can now customize alerts to specify the types of continuing disclosure to trigger a notification and receive more details about the relevant bond and its associated trade activity or filing contained in an alert.

MSRB Proposes Changes to Rules on Below-Minimum Denomination Transactions with Customers

\On February 6th, the SEC requested comments on a proposed rule change filed by the MSRB that would, among other things, transfer the prohibition regarding below-minimum denomination transactions with customers and the two exceptions to the prohibition and the minimum denomination sale disclosure, with certain amendments, to proposed new Rule G-49, which would also include a third exception to permit a dealer to sell a below-minimum denomination position to one or more customers that have a position in the issue and any remainder to a maximum of one customer that does not have a position in the issue. Comments should be submitted on or before March 2, 2017. SEC Release No. 34-79978.

National Futures Association

NFA Announces New Board of Director and Nominating Committee Members

On February 8th, the National Futures Association (“NFA”) announced the members elected to its Board of Directors and 2017 Nominating Committee. The new terms of the Board of Directors and Nominating Committee will begin on February 16, 2017.


NYSE MKT Proposes New Equities Trading Rules to Facilitate Transition to Pillar

On February 9th, the SEC requested comments on a proposed rule change filed by NYSE MKT LLC (“NYSE MKT”) that would allow the exchange to adopt new rules to transition trading on NYSE MKT to Pillar, its new trading technology platform, and to operate as a fully-automated cash equities market. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 13, 2017. SEC Release No. 34-79993.

NYSE MKT Proposes Delay Mechanism

On February 9th, the SEC provided notice of NYSE MKT’s proposed rule change that would provide for a delay mechanism on Pillar that would add the equivalent of 350 microseconds of latency to inbound and outbound order messages. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 13, 2017. SEC Release No. 34-79998.

NYSE MKT Proposes New Rules for Market Makers on Pillar

On February 7th, the SEC requested comments on NYSE MKT’s proposal to adopt rules governing market makers following NYSE MKT’s transition to Pillar that would allow an Equity Trading Permit Holder to register as a Market Maker for all securities that would trade on NYSE MKT, including UTP Securities. Comments should be submitted within 21 day of publication in the Federal Register, which is expected the week of February 13, 2017. SEC Release No. 34-79982.

OneChicago LLC

OCX Proposes Amendments to Rules on Fraudulent Acts

On February 6th, the SEC provided notice of a proposed rule change filed by OneChicago LLC (“OCX”) that would amend its rules on fraudulent acts to clarify that in addition to prohibiting fraudulent acts, the rule also prohibits any attempt to engage in any fraudulent act and to include language that expressly prohibits the use or employment of any manipulative device, scheme, or artifice to defraud. Comments should be submitted on or before March 2, 2017. SEC Release No. 34-79979.

Judicial Developments

PNC Bank Is Not Liable for Sigillito Ponzi Scheme

Plaintiffs sued PNC Bank for racketeering and conspiracy after their investment in the British Lending Program (“BLP”), a $56 million Ponzi scheme operated by Martin Sigillito. Plaintiffs alleged PNC’s predecessor, Allegiant Bank, conspired with Sigillito in his scheme to defraud investors when it served as custodian for the IRAs of those who chose to invest in the BLP at its inception. The district court granted summary judgment to PNC and the Eighth Circuit affirmed on February 7th, agreeing that there was a lack of evidence to show that Allegiant, which quit as custodian in 2001, was aware of lawbreaking. Aguilar v. PNC Bank, N.A.     

Hedge Fund Scheme Conviction and Seven-Year Sentence Is Affirmed

Appellant investment adviser  was convicted after a jury trial of conspiracy, willful violation of the Investment Advisers Act, wire fraud, and corruptly impeding the administration of internal revenue laws arising from a fake hedge fund scheme. Appellant argued that the court’s “reasonable doubt” instructions misled the jury into applying a lesser standard of proof, and that her sentence was too severe. On February 6th, the First Circuit affirmed the conviction and seven-year prison sentence. The panel held that the jury instructions were not erroneous and that the sentence was within the court’s discretion. United States v. Rosalind Herman.

Industry News

Europe Nervous over President Trump’s Promise to Dismantle Dodd-Frank

On February 7th, Bloomberg reported that Europe is nervous by President Trump’s promise to rip up the Dodd-Frank Act, as officials overseas foresee a threat to global financial stability.     

President Trump’s Review of Banking Rules Increases Uncertainties over Global Standards Talks

On February 7th, Reuters reported that President Trump’s review of post-financial crisis banking rules could mark the end for new global standards now being finalized and tear apart a common approach to regulating international lenders.   

SEC Faces Hurdles in Attempting to Comply with Executive Orders

On February 6th, The Wall Street Journal reported that litigation could prevent efforts by the SEC to comply with all-encompassing executive orders intended to roll back financial regulations. The SEC, which does not have the authority to revoke the Dodd-Frank Act, can offer relief by amending its rules or granting exemptions, a procedure that is open to judicial review. According to legal experts and former SEC staff, any legal objections could slow the agency’s already extensive amendment process, thereby obstructing its ability to execute President Trump’s executive orders. 

Gorsuch Nomination Sheds Light on Agency Powers

On February 6th, DealBook reported that the nomination of Judge Neil M. Gorsuch to the U.S. Supreme Court raises questions as to how his judicial philosophy might affect issues related to the investigation and prosecution of white-collar crime, the scope of federal authority, and how much deference a court should give to an interpretation of the law by an administrative agency when Congress gives it the authority to adopt rules.