Insights from Winston & Strawn

Last Tuesday, the election produced surprising and unexpected results with Donald Trump winning the presidency. Pundits are suggesting many areas that may undergo significant change now that Republicans control the Presidency, the House and the Senate. We think that the regulation of financial services may be one of the areas that is most immediately impacted. Indeed, while the Dow Jones Industrial Average, S&P 500 and Nasdaq all finished the week higher, bank and financial sector stocks had particularly strong gains.

News outlets have reported that the new administration and Congress may reevaluate certain elements of the Dodd-Frank Act. The Wall Street Journal noted last Thursday that a “wish list of Dodd-Frank changes . . . includes everything from regulatory exemptions for community banks and regional banks to a new regime for insurers and asset managers to curbs on the federal government’s influence over consumer-finance products such as mortgages and payday loans.” Sen. Elizabeth Warren has already voiced strong opposition to dismantling any parts of the Dodd-Frank Act or curtailing the authority of the Consumer Financial Protection Bureau (“CFPB”).

Additionally, the following areas of the financial services regulatory environment may be candidates for change: (i) the Department of Labor’s new fiduciary rule (although businesses should be aware that it will be very difficult for changes to be implemented before it is scheduled to take effect); (ii) the Financial Stability Oversight Council (“FSOC”) may be subject to additional transparency with regard to its operations and requirements to comply with elements of the Administrative Procedures Act; and (iii) in line with the recent court case declaring the structure of the CFPB to be unconstitutional, the structure of the CFPB may be altered to more closely resemble that of other commissions, such as the Securities and Exchange Commission (“SEC”). In particular, Texas Representative Jeb Hensarling has drafted a bill that has been dubbed the Financial CHOICE Act, and includes a provision whereby banks can free themselves from various regulations, such as tough stress testing, as long as they maintain capital equal to at least 10% of total assets and high ratings from their regulator, requiring that many financial regulations be subject to cost-benefit analysis for the first time and tying the budgets of regulatory agencies, including the CFPB, to congressional appropriations. More generally, new financial regulation may be slowed by the implementation of a temporary moratorium on new regulation and/or a federal hiring freeze.

Even without changes to existing legislation, there are bound to be changes in leadership at the Treasury and the Federal Reserve as well as the SEC and the CFTC. Various bankers and certain members of Congress have been rumored to be in line for possible appointment to be Treasury Secretary. Forbes noted that with respect to the Federal Reserve Board, “President-elect Donald Trump will get to appoint a new chair and vice-chair in 2018 and there are also currently two vacant spots on the board.” Similarly, there are two vacancies on each of the SEC and the CFTC, so the composition of both agencies will change as those vacancies get filled. In addition, the President appoints the chairperson of each agency.

It is unclear what Congress’ priorities will be in the new year; however, please let us know if you would like W&S to assist you in preparing comment letters to Congressional leaders on your behalf on any of these issues as this may present an opportune time to help steer the course of the next Congress.

The policy and agency leadership implications of the new administration and Congress are still extremely speculative, but we will be monitoring these events closely to be able to provide timely advice and share updates in this area through future FS Updates and client briefings.

Feature: Recent Developments in the European Union

European Securities and Markets Authority

ESMA Clarifies Key Dates for Implementation of MIFID II Systematic Internalizer Regime
On November 4th, the European Securities and Markets Authority (“ESMA”) revised its Q&A on the revised Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation (“MiFID II/MiFIR”) to offer guidance on important dates in the implementation of the Systematic Internalizer (“SI”) regime. ESMA Press Release.

ESMA Names Enforcement Priorities for 2016 Financial Statements
On October 31st, ESMA issued a public statement that highlights its enforcement priorities for listed companies’ 2016 financial statements, which include the presentation of financial information, the distinction between equity instruments and financial liabilities, and disclosures of the impact of new standards on International Financial Reporting Standards (“IFRS”) financial statements. ESMA also emphasized the need for companies to disclose the potential impact of Brexit in their financial statements. ESMA Press Release.

ESMA and EBA Propose Criteria for Suitability Assessments of the Management Body and Other Key Executives at Credit Institutions and Investment Firms
On October 28th, ESMA and the European Banking Authority (“EBA”) requested comments on jointly proposed draft guidelines that would establish common criteria for regulators to use to assess the suitability of key members of the management body at credit institutions and investment firms. Comments should be submitted by January 28, 2017. ESMA Press Release. Business Insider reported that the industry will likely object to the proposal’s requirement that regulators complete all suitability checks before management members are appointed.   

ESMA Publishes MiFIR Reporting Instructions
On October 27th, ESMA released detailed reporting instructions and XML schemas under its Financial Instruments Reference Data System (“FIRDS”), which covers the MiFIR and the Market Abuse Regulation (“MAR”) requirements for reference data collection and publication. The instructions and designed schemes under FIRDS are designed to help firms prepare for their transaction reporting obligations under MiFIR. ESMA Press Release.

ESMA Revises Q&As on the Implementation of MAR. On October 26th, ESMA updated its guidance on the implementation of MAR in a revised Q&A document. The guidance includes a new question on managers’ transactions and four new questions addressing investment recommendation and information recommending or suggesting an investment strategy. ESMA Press Release.

European Banking Authority

EBA Chair Says Basel Committee Will Ease New Capital Rules
On November 9th, Reuters reported that EBA chair Andrea Enria told the European Parliament's economic affairs committee that he expects the Basel Committee on Banking Supervision to make significant changes to its planned bank capital rules to reduce their impact on banks. The article noted that EU officials have said they will not apply the new rules in their current form because they fear large increases in capital requirements could freeze lending to the economy.

EBA Seeks Comments on Proposed Standards for Information Requirements for Credit Institution Authorizations
On November 8th, the EBA opened a consultation on two sets of standards on the information required as part of the authorization process for credit institutions. The proposed regulatory technical standards would establish the information to be provided to competent authorities in the application for authorization. The draft implementing technical standards proposes the standard forms, templates, and procedures for use during the application process. Comments should be submitted by February 8, 2017. EBA Press Release.

EBA Makes Recommendations on Implementation of Counterparty and Market Risk Frameworks
On November 4th, the EBA responded to the European Commission’s calls for advice on the European adoption of the Basel Committee’s proposed frameworks on counterparty risk and market risk. The EBA’s report assesses the impact that the two frameworks will likely have on institutions and makes several recommendations on their implementation. EBA Press Release. 

EBA Proposes Lighter Capital Requirements for Smaller Investment Firms
On November 4th, Reuters reported on the EBA’s consultation on a new prudential regime for investment firms, which proposes a proportionate approach to capital requirements for investment firms. The article notes that the proposed framework is additional evidence of the EBA’s embrace of a more tailored approach to capital. Comments on the EBA’s proposal should be submitted on or before February 2, 2017. 

EBA Publishes Final Guidelines on ICAAP and ILAAP Information
On November 3rd, the EBA issued final guidelines on the collection of information related to the internal capital adequacy assessment process (“ICAAP”) and the internal liquidity adequacy assessment process (“ILAAP”), which specify the information that competent authorities should collect from institutions to perform their assessments and establish criteria for the organization of ICAAP and ILAAP information. EBA Press Release. 

EBA Opens Consultation on Guidelines on Authorization and Registration under PSD2
On November 3rd, the EBA requested comments on proposed guidelines that would establish the information requirements for applicants intending (i) to obtain authorization as payment and electronic money institutions, and (ii) to register as account information service providers under the revised Payment Service Directive (“PSD2”). Comments should be submitted by February 3, 2017. EBA Press Release. 

EBA Seeks Comments on Revised Internal Governance Guidelines
On October 28th, the EBA launched a consultation on proposed changes to its guidelines on internal governance, which emphasize the duties and responsibilities of the management body of financial institutions in its supervisory function in risk oversight as well as the establishment of a risk culture, a code of conduct and the management of conflicts of interest. Comments should be submitted by January 28, 2017. EBA Press Release.

European Central Bank

ECB Announces Changes to Its Risk Control Framework for Collateral Assets
On November 3rd, the European Central Bank (“ECB”) announced that it will make adjustments to its risk control measures and collateral eligibility rules. The ECB will update haircuts for marketable and non-marketable assets and introduce graduated haircuts for eligible asset-backed securities, effective January 1, 2017. The ECB will also institute graduated haircuts depending on remaining maturity for floating-rate assets and modify the risk control measures for retained covered bonds with extendible maturities; the effective date for these changes will be announced in the second half of 2017. ECB Press Release. 

ECB Reports on Structural Changes in Euro Area Financial Sector
On October 27th, the ECB released its 2016 Report on Financial Structures, which found that, among other things, the euro area banking sector continued to consolidate during 2015, banks’ capital ratios improved, and non-performing loan ratios fell for the first time since the financial crisis. ECB Press Release.

European Commission

European Commission Extends Application Date of PRIIPs Regulation
On November 9th, the European Commission announced that it has proposed a one-year extension to the date of application of the Regulation on Key Information Documents (“KIDs”) for Packaged Retail and Insurance-based Investment Products (“PRIIPs”). The Commission cited the need to finalize the Regulatory Technical Standards on the format and methodology used to compile the KID, which were rejected by the European Parliament, in making its proposal. The Commission expects that the revised PRIIPs framework will apply as of January 1, 2018. European Commission Press Release.

Banking Agency Developments

Office of the Comptroller of the Currency

Prohibition Against Interstate Deposit Production: Annual Host State Loan-to-Deposit Ratios

On November 9th, the OCC announced that it, along with the Federal Reserve and the FDIC on June 17, 2016, issued the host state loan-to-deposit ratios that they will use to determine compliance with Section 109 of the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994.

Revised Uniform Interagency Consumer Compliance Rating System

On November 8th, the OCC announced that the FFIEC is issuing the revised Uniform Interagency Consumer Compliance Rating System to reflect regulatory, supervisory, technological, and market changes since the system was established. The revised system is effective for all OCC examinations that start on or after March 31, 2017.

Notice of Proposed Rulemaking on Loans in Areas Having Special Flood Hazards

On November 7th, the OCC announced that it, in conjunction with the Federal Reserve Board, the FDIC, the FCA, and the NCUA are issuing a proposed rule that would implement the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012. The proposed rule would require regulated lending institutions to accept policies that meet the statutory definition of “private flood insurance” in the Biggert-Waters Act. The proposed rule also would permit regulated lending institutions to accept flood insurance provided by private insurers that does not meet the statutory definition of private flood insurance, subject to certain restrictions. The proposed rule has a 60-day comment period, ending on January 6, 2017.

OCC to Launch Web-Based System for Licensing and Public Welfare Investment Filings

On November 7th, the OCC announced that it will launch a web-based system for banks to file licensing and public welfare investment applications and notices beginning early next year.

Federal Financial Institutions Examination Council 

FFIEC Issues Uniform Interagency Consumer Compliance Rating System

On November 7th, the FFIEC announced the issuance of an updated Uniform Interagency Consumer Compliance Rating System. The revisions reflect the regulatory, examination, technological, and market changes that have occurred since the release of the original rating system. The FFIEC member agencies plan to implement the updated rating system on consumer compliance examinations to begin on or after March 31, 2017.

Treasury Department Developments

Treasury Department

Treasury Finalizes Action to Further Restrict North Korea’s Access to the U.S. Financial System

On November 4th, Financial Crimes Enforcement Network (“FinCEN”) announced that it has issued a final ruleunder Section 311 of the USA PATRIOT Act to further restrict North Korea’s access to the U.S. financial system. The final rule prohibits U.S. financial institutions from opening or maintaining correspondent accounts for North Korean banks and also requires U.S. financial institutions to apply additional due diligence measures in order to prevent North Korean financial institutions from gaining improper indirect access to U.S. correspondent accounts.

Securities and Exchange Commission


Revised Financial Reporting Manual Includes Guidance on New Accounting Standards

On November 9th, the SEC’s Division of Corporation Finance published a revised Financial Reporting Manual. The revised manual includes new guidance relating to the implementation of several new accounting standards, including standards on recognizing revenue from contracts with customers and on leases. The revised manual also clarifies (i) the guidance on emerging growth company financial statements, (ii) the guidance on how the loss of smaller reporting company status impacts filing deadlines, and (iii) the fillings required after the effectiveness of Form 10. Revised Financial Reporting Manual.

Corporation Finance Offers New Guidance on Rule 457 and the Computation of Registration Fees

On November 9th, the SEC’s Division of Corporation Finance published new and revised Compliance and Disclosure Interpretations (“C&DIs”) on the computation of filing fees under Rule 457 of the Securities Act.  Revised C&DI 240.11 addresses whether an issuer can transfer the filing fees for excess securities to a new registration statement while maintaining the original Form S-8 to cover the exercise of outstanding stock options. New C&DI  240.15 discusses whether the registration fees due from the filing of a Form S-8 to register shares under a new equity compensation plan can be offset by the registration fees paid for outstanding shares from a prior equity compensation plan included on the new Form S-8. New C&DI 240.16 discusses the information that issuers must include regarding the offset of filing fees in a note to the Calculation of Registration Fee table.

Corporation Finance Publishes New and Revised C&DIs on Form S-8

On November 9th, the SEC’s Division of Corporation Finance revised its C&DIs on Securities Act Form S-8. Revised C&DI 126.06 explains how a company can register securities to be issued pursuant to two plans on the same registration statement. New C&DI 126.43 discusses whether the registration fees due from the filing of a Form S-8 to register shares under a new equity compensation plan can be offset by the registration fees paid for outstanding shares from a prior equity compensation plan included on the new Form S-8. New C&DI 126.44discusses the information that issuers must include regarding the offset of filing fees in a note to the Calculation of Registration Fee table.

No Action Letters 

Division of Investment Management Offers Guidance on Treatment of Operating Leases in Determining Broker-Dealers’ Net Capital

In a response to a request from the Securities Industry and Financial Markets Authority (“SIFMA”), the SEC’s Division of Investment Management issued a no-action letter on November 8th that addresses the treatment of operating leases under Rule 15c3-1 of the Securities Exchange Act. In the letter, the Division indicated that it would not recommend enforcement action if a broker-dealer computing net capital adds back an operating lease asset to the extent of the associated operating lease liability or if a broker-dealer determining its minimum net capital requirement using the aggregate indebtedness to net capital ratio standard does not include in its aggregate indebtedness an operating lease liability to the extent of the associated operating lease asset.

Speeches and Statements

Grim Discusses Developments Affecting Insurance Investment Products

In remarks to the ALI CLE 2016 Conference on Life Insurance Products on November 4th, SEC Division of Investment Management Director David W. Grim reviewed recent rulemaking developments, including new rules modernizing the reporting of information by registered investment companies and requiring certain investment companies to establish liquidity risk management programs. Grim also discussed developments and trends affecting investment products offered by insurance companies, including buyout offers and the Division’s recent guidance on risk disclosure.

Other Developments

SEC Will Take Up Consolidated Audit Trail at Open Meeting

The SEC will hold an Open Meeting on November 15, 2016, to consider whether to approve a proposed national market system ("NMS") plan to create, implement, and maintain a consolidated audit trail. SEC Meeting Notice.

Equity Market Structure Advisory Committee Will Hold Public Meeting

On November 8th, the SEC announced a public meeting of its Equity Market Structure Advisory Committee, which will take place on November 29, 2016. The SEC invited the public to submit written statements to the committee in advance of the meeting. Statements should be submitted on or before November 23, 2016.

Investor Advocate Recommends that SEC Approve FINRA’s and MSRB’s Mark-Up Disclosure Proposals

In a letter to the SEC dated November 7th, SEC Investor Advocate Rick A. Fleming encouraged the agency to approve proposed rules submitted by the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (“MSRB”) that would require firms to disclose mark-ups and mark-downs from the prevailing market price on retail customer confirmations relating to certain transactions in fixed income securities and municipal securities. Fleming maintained that the proposed rule changes “are long overdue and will greatly benefit retail investors.”

EDGAR Updates

On November 4th, the SEC published the EDGAR ABS XML Technical Specification (Version 1.4)

Commodity Futures Trading Commission

CFTC Approves Final Rule Amending Timing for Filing CCO Annual Reports by Certain Registrants

On November 10th, the CFTC announced that it unanimously approved a final rule amending a CFTC regulation addressing the timing for filing CCO annual reports for certain registrants. The Final Rule is effective immediately upon publication in the Federal Register.

Market Risk Advisory Committee Announces Agenda for November 17th Public Meeting

On November 10th, the CFTC announced the agenda for the upcoming Market Risk Advisory Committee (“MRAC”) public meeting on November 17, 2016 at CFTC’s headquarters in Washington, D.C. At this meeting, the CCP Risk Management Subcommittee will present to the MRAC its final recommendations on how Central Counterparties (“CCPs”) can further enhance their efforts in preparing for the default of a significant clearing member as discussed at the April 2, 2015, November 2, 2015, and June 27, 2016 meetings of the MRAC; and the MRAC will discuss the Bank of England’s coordinated CCP default fire drill.

CFTC Approves Supplemental Proposal to Automated Trading Regulation

On November 4th, the CFTC announced that it has approved a supplemental proposal to Automated Trading Regulation at an Open Commission meeting. Fact Sheet. Q&A. Chair Massad StatementCommissioner Bowen Concurring StatementCommissioner Giancarlo Statement of Dissent.

Federal Rules Effective Dates

November 2016 – January 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

SEC Approves CBOE’s Amended Price Protection Mechanisms and Risk Controls

On November 4th, the SEC issued an order granting accelerated approval to the Chicago Board Options Exchange, Incorporated’s (“CBOE”) proposal to amend current and adopt new price protection mechanisms and risk controls for orders and quotes. The SEC also requested comments on CBOE’s amendment to the proposal, which made revisions to the proposed rule text to conform to CBOE’s description in the Notice of the drill through price check parameter and amended its discussion of existing quote risk monitor functionality to accurately match the existing rule text. Comments should be submitted on or before December 1, 2016. SEC Release No. 34-79244.

Financial Industry Regulatory Authority

SEC Approves FINRA’s Proposed Amendments to Procedures for Handling Motions to Dismiss in Arbitration

On November 10th, the SEC approved FINRA’s proposal to amend its arbitration rules to allow arbitrators to act upon a motion to dismiss a party or claim prior to the conclusion of a party’s case if the arbitrators determine that the non-moving party previously brought a claim regarding the same dispute against the same party, and the dispute was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision. SEC Release No. 34-79285.

Municipal Securities Rulemaking Board

MSRB Announces Members of Investor Advisory Group

On November 10th, the MSRB announced members of its Investor Advisory Group for 2017. The Investor Advisory Group, which advises the MSRB’s Board of Directors on municipal market practices, transparency, and investor protection issues, will focus on several key topics during 2017, including primary offering practices and the potential addition of pre-trade data to the Electronic Municipal Market Access (“EMMA”) website. MSRB Press Release.


SEC Approves NASDAQ Exchanges’ Proposed Changes to Post-Only Orders and Orders with Midpoint Pegging

On November 10th, the SEC approved the proposed rule changes filed by NASDAQ BX, Inc. (“BX”) and The Nasdaq Stock Market LLC (“Nasdaq”) that amend the behavior of Post-Only Orders when they interact with resting Non-Displayed Orders, and the behavior of Orders with Midpoint Pegging in a crossed market. SEC Release No. 34-79290.

SEC Accelerates Approval of Phlx’s Rule Changes on Openings in Options

On November 9th, the SEC issued an order granting accelerated approval to NASDAQ PHLX LLC’s (“Phlx”) proposal to amend its rules governing the opening of trading in options series by defining certain terms relating to its opening process for option series, reorganizing certain provisions in the rule, and making minor changes to the provision regarding eligible opening interest. The SEC also requested comments on Phlx’s partial amendment to the rule. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 14, 2016. SEC Release No. 34-79274.

SEC Approves Phlx’s Proposed Changes to Rules on Specialists and Registered Options Traders. On November 7th, the SEC issued an order approving Phlx’s proposed rule change to delete or amend its rules relating to specialists and Registered Options Traders (“ROTs”) by, among other things, removing rules that require them to submit reports on the opening positions and purchases and sales in certain options and orders. SEC Release No. 34-79249.


NYSE Exchanges Proposes Changes to Rules Governing DMM Activity at the End of Trading

On November 10th, the SEC requested comments on the New York Stock Exchange LLC’s (“NYSE”) and NYSE MKT LLC’s (“NYSE MKT”) separately filed proposals to amend their respective rules by deleting provisions that prohibit Designated Market Makers (“DMM”) from establishing a new high (low) price on the exchange in a security the DMM has a long (short) position during the last ten minutes prior to the close of trading. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 14, 2016.