Insights from Winston & Strawn

Among the instruments that EU lawmakers have passed to pave the way of the Banking Union, the Directive on Deposit Guarantee Schemes (“DGS”) strengthens the protection of citizens’ deposits in case of bank failures1. In each EU country that has implemented the Directive, DGS reimburse a limited amount of deposits (€ 100,000) to depositors whose bank has failed. From the depositors’ point of view, this protects a part of their wealth from bank failures. From a financial stability perspective, this promise prevents depositors from making panic withdrawals from their bank, thereby preventing severe economic consequences.  

On November 25, 2015, the European Commission announced a proposal2 to set up a european-wide insurance scheme for bank deposits, known as European Deposit Insurance Scheme (“EDIS”). The Commission’s legislative proposal would guarantee citizens’ deposits at the euro area level.  

The scheme would develop over time and in three stages. It would consist of a re-insurance of national DGS, moving after three years to a co-insurance scheme, in which the contribution of EDIS will progressively increase over time. As a final stage, a full EDIS is envisaged in 2024, although the fund itself would be created from the outset. It will be financed directly by bank contributions, adjusted for risk and managed by the existing Single Resolution Board.  

The Commission’s proposal starts with a re-insurance approach which would last for 3 years until 2020. In the re-insurance phase, a national DGS could access EDIS funds only when it had first exhausted all its own resources; and – as in all further phases – if it complied with the DGS Directive. There will be safeguards to ensure that national schemes can access the EDIS only when justified, and to address possible moral hazard. In particular, EDIS funds would only be available if the relevant rules in the DGS Directive have been fully applied by the Member State concerned. Any use of EDIS funds will be closely monitored. Any EDIS funds that are found to have been received inappropriately by a national scheme will have to be fully reimbursed.  

After 3 years as a re-insurance scheme, in 2020 EDIS would become a progressively mutualised system relying on co-insurance, still subject to appropriate limits and safeguards against abuse.  

The key difference in this phase is that a national scheme would not be required to exhaust its own funds before accessing EDIS funds. EDIS would be available to contribute a share of the costs from the moment that bank depositors need to be reimbursed. This introduces a higher degree of risk-sharing between national schemes through EDIS. The share contributed by EDIS will start at a relatively low level (20%) and will increase over a four year period.  

By gradually increasing the share of risk that EDIS assumes to 100%, EDIS will fully insure national DGS as of 2024.

Feature: Department of Labor’s Proposed Fiduciary Rule

In 2010, the U.S. Department of Labor (“DOL”), which regulates retirement plan advice, first unveiled a controversial proposal that would raise investment advice standards for brokers who work with retirement accounts by requiring those brokers to follow a “fiduciary” standard of putting their clients’ best interests before their own profits. On January 26, 2016, following an extended comment period, the DOL submitted its long-awaited final proposed rule to the Office of Management and Budget (“OMB”) for its mandatory review. In the meantime, the Securities and Exchange Commission (“SEC”), which has been directed by The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to consider ways in which to reinforce and expand existing fiduciary standards under the securities law, has not yet taken any action.  

The DOL drafted the fiduciary rule in an effort to address loopholes that currently exist. Brokers today are permitted to recommend investment vehicles that bring in significant fees and commissions but are not always the best option for investors. The fiduciary rule aims to end potential conflicts of interest by brokers who advise on individual retirement accounts and to protect consumers from buying unnecessary investment products that earn brokers substantial fees when they advise clients to “roll over” assets from employer-sponsored retirement plans into IRAs.  

The financial industry is not happy with the proposed tighter regulations. First of all, Congress and industry groups want to wait until the SEC revises its fiduciary standard. Whether or not that happens in the near future, the industry has argued that the DOL’s strict fiduciary rule would significantly increase brokers’ regulatory and liability costs and price middle-income investors out of the advice market. Other critics of the fiduciary rule aver that less-sophisticated investors will not be able to get advice because of regulatory constraints and compliance costs. The most significant complaints contend that the costs of complying with the rule and the increased legal liability could hurt brokerages’ businesses and, as a result, limit advice to small investors because fewer brokerages would offer services to them.  

In February 2015, Obama addressed this pressing issue at a White House event that was hosted by AARP. Knowing that the financial industry would inevitably try to preclude the ruling “with everything they’ve got,” President Obama asserted that he will not back down from helping make the proposal a reality before he leaves office. He added that financial advisors “shouldn’t be able to take advantage of their clients.”  

Despite President Obama’s push, it looks like the rule will not be finalized any time soon as its critics and lawmakers are attempting to slow down its momentum. The House Education and Workforce Committee approved two bills that offer alternative fiduciary standards and would require the DOL to receive congressional approval before implementing its fiduciary rule. The first bill would amend the Internal Revenue Code to subject investment advisers to liability for providing advice impermissible under the prohibited transaction provisions or for breaching the fiduciary standard. The second bill would amend the Employee Retirement Income Security Act (“ERISA”), which is the same law that DOL is using as the impetus for its fiduciary rule. According to the American Action Forum (“AAF”), which is a “center-right policy institute,” these two bills strike a balance by requiring a best interest standard while at the same eliminate most parts of the fiduciary rule that the AAF believes would put many investment advisers out of business and significantly reduce the availability of advice, especially to low- and middle-class retirement savers.  

As another alternative to the fiduciary rule, the Financial Services Roundtable (“FSR”) is advocating for simplified disclosure of conflicts of interest. Jill Hoffman, FSR’s vice president of government affairs for investment management, argued that the fiduciary rule “is too onerous for most firms to comply with,” adding that investors will either “pay a fee for service or they will have to sign a best interest contract right off the bat … consumers balk at the thought of signing a contract before they’ve even had a conversation with the adviser about their needs … then there is the legal liability involved with a contract.” Hoffman questioned, “What does it mean if the market goes down and the investor loses money? Did they not get advice in their best interest?”  

Pam O’Rourke, senior vice president and senior counsel for Integrated Retirement Initiatives and a proponent of the fiduciary rule, looks at it from a different angle. She finds that, while the fiduciary rule may make some brokers leave the retirement plan space altogether, it will create opportunities for other brokers to pick up that business.  

Barbara Roper, director of investor protection for the Consumer Federation of America and a steadfast advocate of the fiduciary rule, said that the DOL’s submission of the rule to OMB early in the year “greatly reduces the chances that Congress will be able to overturn the rule” and added that “while Congress may have the votes to pass a joint resolution of disapproval, President Obama would be sure to veto it.”

Once the final rule is issued the industry will have eight months to fully adapt to the new regulations.

Banking Agency Developments


OCC Releases CRA Evaluations for 20 National Banks and Federal Savings Associations

On February 3rd, the Office of the Comptroller of the Currency (“OCC”) released a list of Community Reinvestment Act (“CRA”) performance evaluations that became public during January 1, 2016 through January 31, 2016. The list contains only national banks, federal savings associations, and insured federal branches of foreign banks that have received ratings. OCC Press Release.


FDIC Issues List of Banks Examined for CRA Compliance

On February 5th, the Federal Deposit Insurance Corporation (“FDIC”) issued its list of state nonmember banks recently evaluated for compliance with the CRA. The list covers evaluation ratings that the FDIC assigned to institutions in November 2015. FDIC Press Release.

FDIC Publication Focuses on Enhancing Banks’ Cybersecurity Programs

On February 1st, the FDIC published “A Framework for Cybersecurity,” which appears in the Winter 2015 issue ofSupervisory Insights, discusses the cyber threat landscape and how financial institutions’ information security programs can be enhanced to address evolving cybersecurity risks. The article also provides an overview of actions taken by the FDIC individually and with other regulators in response to the increase in cyber threats.FDIC Press Release.

Federal Reserve

Reserve Bank Operations and Payment Systems Director to Retire

On February 3rd, the Federal Reserve announced that Louise L. Roseman, director of the Division of Reserve Bank Operations and Payment Systems, will retire later this year after more than 30 years of service to the Federal Reserve Board, including 17 years as director. Federal Reserve Press Release.

Federal Reserve Highlights Progress in Efforts to Improve U.S. Payment System

On February 2nd, the Federal Reserve issued a report, one year after the publication of its Strategies for Improving the U.S. Payment System, detailing the progress made and outlined anticipated steps for moving forward with its initiative to enhance payment system speed, efficiency, and security. Federal Reserve Press Release.

Treasury Department Developments

U.S. Department of the Treasury

Treasury Announces Marketable Borrowing Estimates

On February 1st, the U.S. Department of the Treasury announced its current estimates of net marketable borrowing for the January – March 2016 and April – June 2016 quarters. Department of the Treasury Press Release.


CFPB Takes Steps to Improve Checking Account Access

On February 3rd, the Consumer Financial Protection Bureau (“CFPB”) announced that it is taking steps to improve checking account access amid CFPB concerns that consumers are being sidelined by the lack of account options and by inaccurate information used to screen potential customers. The CFPB also sent a letter to the 25 largest retail banks encouraging them to make available and widely market lower-risk deposit accounts that help consumers avoid overdrafting. The CFPB further issued a bulletin warning banks and credit unions that failure to meet accuracy obligations when they report negative account histories to credit reporting companies could result in Bureau action. In addition, the CFPB announced that it is providing consumers with resources to help navigate the deposit account system. CFPB Press ReleaseCordray Remarks.

Securities and Exchange Commission


SEC Issues Guidance on Funding Portal Registration

The SEC’s Division of Trading and Markets provided answers to frequently asked questions regarding funding portal registration requirements and procedures in a small entity compliance guide published on January 29th. The guide summarizes and explains the SEC’s rules related to funding portal registration under Regulation Crowdfunding and provides links to the adopting release, rule text, and relevant instructions and forms. SEC Funding Portal Registration Guide.

Speeches and Statements

SEC’s Cohen Highlights Efforts of SEC to Combat Fraud in EB-5 Immigrant Investor Program

The SEC’s Division of Enforcement Associate Director Stephen L. Cohen testified before the Senate Judiciary Committee on February 2nd regarding the SEC’s work related to the United States Citizenship and Immigration Services’ (“USCIS”) EB-5 Immigrant Investor Program. Cohen noted that while the SEC has no role in administering the program, the SEC has investigated a growing number of complaints regarding securities violations and fraud in the program and has brought 19 enforcement actions between February 2013 and December 2015. Cohen cited the strong working relationship that has developed between the SEC and USCIS as the agencies have worked together to investigate fraudulent activity and other securities violations in the program. Cohen Testimony. The Hill reported that the Senate Judiciary Committee is examining the SEC’s and USCIS’s oversight of the EB-5 program as it debates whether to implement reforms to the program or eliminate the program entirely.

Other Developments

SEC Will Consider Final Rules Establishing Additional Registration Requirements for Non-U.S. Security-Based Swap Dealers at Open Meeting

The SEC will hold an open meeting on February 10, 2016, to consider whether to approve final rules that would require non-U.S. persons to include security-based swap transactions connected with their dealing activity that are arranged, negotiated, or executed by personnel located in a U.S. branch or office when calculating the de minimis threshold calculations required to determine mandatory registration with the SEC as a security-based swap dealer. Sunshine Act Meeting Notice.

Advisory Committee on Small and Emerging Companies

Jane Jarcho will serve as the Deputy Director of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), according to an announcement made on February 3rd.  Jarcho currently serves as the National Director of OCIE’s Investment Adviser/Investment Company examination program, a role she will maintain in addition to her new position as the OCIE’s Deputy Director. SEC Press Release.

Equity Market Structure Advisory Committee Meeting

The SEC’s Equity Market Structure Advisory Committee met on February 2nd to discuss the market volatility that occurred on August 24, 2015, as well as additional issues affecting retail and institutional customers in the current equity market structure. In her opening remarks, SEC Chair Mary Jo White reviewed the findings of the SEC’s staff report on the events of August 24th, and updated the committee regarding the SEC’s recent activity relating to equity market structure, including proposed rules to increase ATS transparency. See also Piwowar Remarks. According to a report in Reuters, the committee discussed several potential reforms to prevent future volatility events, including reducing the use of stop orders, abandoning the use of trading halts, and periodically readjusting the upper and lower limits of stock prices.

SEC Partners with FINRA to Host Regional Compliance Outreach Programs for Broker-Dealers

The SEC announced on February 2nd that it will collaborate with FINRA to conduct Regional Compliance Outreach Programs for broker-dealers in six cities beginning this spring. The SEC and FINRA have opened registration for the programs, which will bring together regulators and industry professionals to consider current regulatory issues and generate ideas for effective compliance practices. SEC Press Release.

Commodity Futures Trading Commission

DCO Registration

CFTC Grants Registration to Eurex Clearing AG as a DCO

On February 1st, the U.S. Commodity Futures Trading Commission (“CFTC”) granted Eurex Clearing AG registration as a derivatives clearing organization (“DCO”) under the Commodity Exchange Act (“CEA”). Eurex will be authorized to provide clearing services for swaps for U.S. clearing members as well as their customers under §5b of the CEA. The CFTC’s Division of Clearing and Risk also provided no-action relief that allows Eurex to use a modified version of the acknowledgment letter required under CFTC Regulations 1.20(g)(4) and 22.5 for customer accounts maintained at the Deutsche Bundesbank, the central bank of Germany. CFTC Press Release.CFTC Letter No. 16-04CFTC Letter No. 16-05Massad Statement.


Chairman Massad Speaks Before Commodity Markets Council

On February 1st, CFTC Chairman Timothy Massad gave the keynote speech before the Commodity Markets Council. Chairman Massad discussed some of the recent actions taken by the CFTC in areas including simplifying recordkeeping requirements and finalizing the rule setting margin requirements for uncleared swaps. He also discussed some of the issues on the CFTC’s agenda for the first part of 2016, including finalizing proposed rule changes related to trade options as well as finalizing rules on position limits. Massad Speech.

Federal Rules Effective Dates

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Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

CBOE Proposes Amended Standards for Calculating Order Submissions by Professionals

On February 4th, the SEC provided notice of a proposed rule change filed by the Chicago Board Options Exchange, Incorporated (“CBOE”) that would amend the definition of Professional in Rule 1.1 to establish amended standards for calculating average daily order submissions for Professional order counting purposes. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 8, 2016. SEC Release No. 34-77049.

International Swaps and Derivatives Association

ISDA Updates OTC Derivatives Compliance Calendar

On February 1st, the International Swaps and Derivatives Association (“ISDA”) published an updated version of its OTC Derivatives Compliance Calendar, which contains key compliance deadlines and regulatory dates affecting global OTC derivatives.


PHLX Proposes Changes to Professional Order Calculations

On February 4th, the SEC published a rule change proposed by NASDAQ OMX PHLX LLC (“PHLX”) that would amend the definition of a Professional to specify the way in which PHLX calculates orders to determine if an order should be treated as Professional. The proposed change would count each order entered by a Professional toward the number of orders, regardless of the options exchange to which the order was routed in determining Professional orders, except for FLEX orders. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 8. SEC Release No. 34-77054.

NASDAQ Exchanges Propose Rules to Adopt Limit Order and Market Order Protection

On February 1st, the SEC provided notice of NASDAQ OMX BX, Inc.’s (“BX”) and PHLX’s separately filed proposals to amend their respective rules to adopt a Limit Order Protection and Market Order Protection to prevent certain orders from executing or being placed on the Order Books at prices outside pre-set limits. Comments should be submitted on or before February 26, 2016.

National Futures Association

NFA Assumes Responsibility for Swap Valuation Dispute Notices in March

On February 2nd, the National Futures Association (“NFA”) notified members that, as of March 1, 2016, swap dealers and major swap participants will be required to file notices of swap valuation disputes in excess of $20 million with the NFA through the NFA’s online filing application, Winjammer.  The CFTC, which currently receives these notices, issued an order authorizing the NFA to receive and maintain the notices and provide the CFTC with relevant summaries and reports. NFA Notice I-16-07.

New York Stock Exchange

NYSE Exchanges Withdraw Proposed Changes to Market Data Product Offerings

On February 3rd, the SEC announced that the New York Stock Exchange LLC (“NYSE”) and NYSE MKT LLC (“NYSE MKT”) have withdrawn their separately filed proposals to amend their respective rules to amend the NYSE Trades market data and NYSE MKT market data product offerings. SEC Release No. 34-77047.

NYSE Considers Eliminating Rule 48 in the Wake of August 24th Volatility

The NYSE will seek SEC approval to eliminate Rule 48, which permits market makers to refrain from publicizing likely opening stock prices, according to a report in Bloomberg on February 2nd. The article notes that, while the NYSE invokes Rule 48 to facilitate orderly trading during times of market volatility, many blame the rule for contributing to the confusion during trading in the U.S. equity market on August 24, 2015. Rule 48.

NYSE Eliminates Obligation For Members to Report Listed Securities Transactions Effected Off Exchange

The NYSE notified member organizations of the NYSE and NYSE MKT LLC on January 29th that, as a result of recent rule amendments eliminating NYSE Rule 410B, they are no longer obligated to report listed securities transactions not reported to the Consolidated Tape to the NYSE or NYSE MKT. NYSE Information Memo 16-1.

Judicial Developments

FSIA Does Not Immunize Foreign Sovereign Against Claim of Securities Exchange Act Violations

Defendant Kazakhstani sovereign wealth fund that allegedly mislead plaintiffs on the value of its subsidiary’s securities appealed from a district court denial of its motion to dismiss based on sovereign immunity. The court found defendant not immune under the FSIA’s commercial-activity exception. In a case of first impression, the Second Circuit held on February 3rd that the FSIA does not immunize an instrumentality of a foreign sovereign against claims it violated federal securities laws by making misrepresentations outside the U.S. concerning the value of securities purchased by investors within the U.S. Atlantica.

Panel Upholds FINRA and SEC Permanent Ban on Banker Who Misused Client Funds(not precedential)

Petitioner banker, who was permanently barred by FINRA from associating with any FINRA member firm for misusing client funds, sought review of an SEC order affirming the disciplinary action taken against him. On February 2nd, the Second Circuit affirmed the order, determining that the SEC properly found “no misunderstanding over the customer’s intended use of the funds” and that petitioner used the funds for personal and business use almost immediately after receiving it, without express permission to do so, “notwithstanding the clear limitations on the use of the deposit until the transaction closed.” West.

Putative Class Action Properly States a Claim as to Two Alleged Misrepresentations

The district court dismissed plaintiff pension fund’s putative class action for failing to allege that defendant creditor’s challenged statements were knowingly or recklessly false, or caused a loss to shareholders. On February 1st, the Ninth Circuit reversed in part, determining that the complaint stated a claim as to two alleged misrepresentations. The panel held that the announcement of an SEC investigation related to an alleged misrepresentation, together with a subsequent revelation of the inaccuracy of that misrepresentation, can serve as a corrective disclosure for the purpose of loss causation. Lloyd.

Commodity Trading Fraud Defendant Who Was Not Registered as a CPO Cannot Raise ‘Reliance on Professional’ Defense

The CFTC brought a commodity trading fraud action against Wilson and JBW Capital LLC. A district court granted summary judgment on the CFTC’s request for a finding of liability, and imposed injunctive relief and civil penalties. On appeal, Wilson and JBW contested the court’s conclusion that they are liable under the Commodity Exchange Act for failing to register with the CFTC and for violating two commodity fraud provisions. On January 29th, the First Circuit affirmed, determining that Wilson cannot raise a “reliance on professional” defense since he was not registered as a commodity pool operator (“CPO”). CFTC.

Industry News

New York Court Throws Out Ex-Moody’s Executive’s Whistleblower Suit

CFO reported that the U.S. District Court for the Southern District of New York ruled on February 4th that Ilya Kolchinsky, a former Moody’s managing director who brought a False Claims Act (“FCA”) suit against the rating agency in 2012 alleging that Moody’s issued bogus credit ratings during the financial crisis, failed to show that any rating of mortgage securities, credit default swaps, or collateralized debt obligations had caused a false claim to be submitted to the government. The court, however, gave Kolchinsky a last chance to make a viable case, noting that he can reallege a claim that Moody’s violated the FCA because government agencies are charged for subscriptions to its credit-rating service. CFO.

Corporate Bribery Cases and Fines Declined in 2015

On February 2, DealBook reported that the number of Foreign Corrupt Practices Act (“FCPA”) enforcement actions and financial penalties declined sharply in 2015, but added that the federal government has indicated that it plans to boost its efforts in pursuing corporate bribery cases. The declined activity was attributed to fewer instances of cases stemming from corporations self-reporting suspicious behavior, a smaller number of big-dollar settlements, and a focus on more complicated, higher value bribery cases, which take longer to investigate.DealBook.

Barclays and Credit Suisse Settling ‘Dark Pool’ Inquiries

On January 31st, DealBook reported that Barclays and Credit Suisse will pay a combined $154.3 million to settle allegations that they misrepresented their private stock trading services. The systems, known as dark pools, are supposed to offer a haven to traditional traders and investors from predatory trading behavior. New York attorney general Eric T. Schneiderman stated that this marks “the first major victory in the fight against fraud in dark pool trading that began when we first sued Barclays: coordinated and aggressive government action, admissions of wrongdoing, and meaningful reforms to protect investors from predatory, high-frequency traders.” A February 1st DealBook article added that such settlements are unlikely to be the last, as regulators continue to pursue abuses in electronic trading. SettlementOpinion.

SEC Scaling Bank Examinations of Brokers to Improve Oversight of Investment Advisers

On January 29th, Reuters reported that the SEC allegedly plans to scale back examinations of brokers so that they can focus on improving the oversight of investment advisors, which have traditionally faced less scrutiny.Reuters.