Insights from Winston & Strawn 

The Securities and Exchange Commission (the “SEC”) filed an action on February 13th in its continued effort to crack down on unregistered brokers. In the suit, the SEC alleges John Abio and his company acted as unregistered brokers and sold unregistered securities. Abio was the highest paid salesperson of Providence Financial Investments, Inc. and Providence Fixed Income Fund, LLC (collectively, “Providence”), and collected over $3 million in commissions. The SEC charged Providence with offering fraud in connection with the sale of $64 million in notes, most of which were sold by unregistered brokers, such as Abio. Abio was personally responsible for the sale of notes to over 100 investors and, further, he prompted those investors to renew their notes in order to collect additional commission payments. 

The guidance from cases like this is three-fold. First, investors should be diligent about the individuals and companies with whom they invest their assets. The SEC’s www.investor.gov website allows an investors to research the broker to confirm they are properly registered and review any disciplinary events. Second, persons who see an opportunity to monetize their rolodex by selling securities for a commission, must review the regulations and rules governing brokers to determine whether they must first be registered. Finally, companies who intend to enter into sales arrangements with brokers must insure all required registrations are in place and current before engaging such salespeople. A company that employs an unregistered broker for the sale of their securities could be subject to rescission. The amount a shareholder would receive pursuant to rescission order would be the price the investor originally paid, irrespective of the current market price of the company’s securities.

Feature: Yellen Testimony on Dodd-Frank

In her first testimony in front of Congress since Donald Trump took office, senators on both sides of the aisle on February 14th and February 15th questioned Federal Reserve Chair Janet Yellen on Republican plans to dismantle Dodd-Frank. In seeking Yellen’s response to Trump’s repeated assertions that Dodd-Frank is a “disaster,” Democratic Senator Elizabeth Warren quoted Trump’s statement that “friends of mine, who have nice businesses, can’t borrow money.” Sen. Warren asked Yellen whether it was accurate to say that banks were not lending as a result of the regulation, which was enacted in an effort to limit risky lending after the financial crisis. Yellen replied, “[w]e have seen growth in active lending in the economy,” and added that commercial and industrial loans were up 75% since 2010.

Sen. Warren further noted that Trump’s economic adviser, Gary Cohn, and Treasury secretary Steve Mnuchin, who is currently working under a Trump-imposed deadline of early May to determine which features of Dodd-Frank to change, adjust at the behest of big banks, or even remove, had both claimed that banks were being held back by the legislation. Citing a Wall Street Journal article on the record profits being logged by Wall Street banks, Warren contradicted Cohn’s and Mnuchin’s negative assessments, adding that “our banks have thrived since we passed Dodd-Frank.” Yellen replied, “I don’t have all the facts at my fingertips, I believe our banks are more profitable.”

Republican Senator Thom Tillis countered Warren’s and Yellen’s evaluations of Dodd-Frank, stating that the legislation had damaged lending to small business. Yellen concurred on that analysis, noting that a few of the law’s regulations were holding back some lenders, predominantly community banks. However, Yellen also defended the pace of bank lending to small businesses, mentioning that an “extremely low number” of small-business owners reported having insufficient access to credit since Dodd-Frank was passed in 2010.

In response to the White House’s statements that Dodd-Frank failed to address the “too big to fail” problem exposed by the 2008 financial crisis, Yellen remarked that the system is actually safer and “much more resilient” than 10 years ago, referenIn her first testimony in front of Congress since Donald Trump took office, senators on both sides of the aisle on February 14th and February 15th questioned Federal Reserve Chair Janet Yellen on Republican plans to dismantle Dodd-Frank. In seeking Yellen’s response to Trump’s repeated assertions that Dodd-Frank is a “disaster,” Democratic Senator Elizabeth Warren quoted Trump’s statement that “friends of mine, who have nice businesses, can’t borrow money.” Sen. Warren asked Yellen whether it was accurate to say that banks were not lending as a result of the regulation, which was enacted in an effort to limit risky lending after the financial crisis. Yellen replied, “[w]e have seen growth in active lending in the economy,” and added that commercial and industrial loans were up 75% since 2010.

Sen. Warren further noted that Trump’s economic adviser, Gary Cohn, and Treasury secretary Steve Mnuchin, who is currently working under a Trump-imposed deadline of early May to determine which features of Dodd-Frank to change, adjust at the behest of big banks, or even remove, had both claimed that banks were being held back by the legislation. Citing a Wall Street Journal article on the record profits being logged by Wall Street banks, Warren contradicted Cohn’s and Mnuchin’s negative assessments, adding that “our banks have thrived since we passed Dodd-Frank.” Yellen replied, “I don’t have all the facts at my fingertips, I believe our banks are more profitable.”

Republican Senator Thom Tillis countered Warren’s and Yellen’s evaluations of Dodd-Frank, stating that the legislation had damaged lending to small business. Yellen concurred on that analysis, noting that a few of the law’s regulations were holding back some lenders, predominantly community banks. However, Yellen also defended the pace of bank lending to small businesses, mentioning that an “extremely low number” of small-business owners reported having insufficient access to credit since Dodd-Frank was passed in 2010.

In response to the White House’s statements that Dodd-Frank failed to address the “too big to fail” problem exposed by the 2008 financial crisis, Yellen remarked that the system is actually safer and “much more resilient” than 10 years ago, referencing the banks’ doubling of high-quality capital, or Tier 1 capital. Yellen stressed the importance of cutting the legal and compliance costs that Dodd-Frank has put on community banks. She proposed that Congress exempt community banks from the Volcker Rule, which restricts banks from making big bets with their own money.

Overall, Yellen defended Dodd-Frank, saying that she “would not want to see it removed.” She disputed Financial Services Committee Chairman and Texas Republican Senator Jeb Hensarling’s comment that the Federal Reserve has not yet “found the proper balance” between regulation and growth, by pointing out that “[w]e’ve put in place stronger financial regulation that has forced our banks to build up their capital buffers to deal with problem loans and to strengthen themselves to the point where they have been to support economic growth and recovery in our economy.”

Sen. Hensarling, who says that “Dodd-Frank clogs the arteries of capitalism in our system,” is not placing his focus on if, but instead on when Dodd-Frank will be repealed. He has stated that rolling back the legislation is a “this-year priority” for the White House and Congress, and plans to introduce revised legislation as soon as this month to dramatically weaken the law and ease rules for banks.cing the banks’ doubling of high-quality capital, or Tier 1 capital. Yellen stressed the importance of cutting the legal and compliance costs that Dodd-Frank has put on community banks. She proposed that Congress exempt community banks from the Volcker Rule, which restricts banks from making big bets with their own money.

Overall, Yellen defended Dodd-Frank, saying that she “would not want to see it removed.” She disputed Financial Services Committee Chairman and Texas Republican Senator Jeb Hensarling’s comment that the Federal Reserve has not yet “found the proper balance” between regulation and growth, by pointing out that “[w]e’ve put in place stronger financial regulation that has forced our banks to build up their capital buffers to deal with problem loans and to strengthen themselves to the point where they have been to support economic growth and recovery in our economy.”

Sen. Hensarling, who says that “Dodd-Frank clogs the arteries of capitalism in our system,” is not placing his focus on if, but instead on when Dodd-Frank will be repealed. He has stated that rolling back the legislation is a “this-year priority” for the White House and Congress, and plans to introduce revised legislation as soon as this month to dramatically weaken the law and ease rules for banks.

Banking Agency Developments

OCC

Revised Comptroller’s Licensing Manual Booklet

On February 16th, the Office of the Comptroller of the Currency (“OCC”) announced that it has issued the “Changes in Directors and Senior Executive Officers” booklet of the Comptroller’s Licensing Manual, which updates procedures and requirements following the integration of the Office of Thrift Supervision into the OCC in 2011, and incorporates revised regulations that became effective July 1, 2015, addressing changes in directors and senior executive officers of national banks, federal savings associations, and federal branches.

Revised Scenarios Released for Stress Tests

On February 10th, the OCC released its revised economic scenarios for use by certain financial institutions with total consolidated assets of more than $10 billion for the 2017 stress tests. The previously released scenarios contained incorrect historical values for the BBB corporate yield in 2016. The OCC works with the Federal Reserve Board of Governors and the Federal Deposit Insurance Corporation (“FDIC”) to develop and distribute the scenarios. Those agencies also issued corrected data (see FDIC revision and Federal Reserve revision).

CFPB

CFPB Explores Impact of Alternative Data on Credit Access for Consumers Who Are Credit Invisible

On February 16th, the Consumer Financial Protection Bureau (“CFPB”) announced that it has launched an inquiry into ways to expand access to credit for consumers who are credit invisible or who lack enough credit history to obtain a credit score.The agency is seeking public feedback on the benefits and risks of tapping alternative data sources such as bills for mobile phones and rent payments to make lending decisions about consumers whose lack of credit history might otherwise block opportunities.

Securities and Exchange Commission

Interim Final Rules

SEC Extends Expiration Dates in Interim Final Rules on Exemptions for Security-Based Swaps

On February 10th, the SEC adopted amendments to the expiration dates in its interim final rules that provide exemptions for offers and sales of security-based swap agreements that became security-based swaps on the effective date of Title VII of the Dodd-Frank Act from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as from the Exchange Act registration requirements and from the provisions of the Trust Indenture Act, subject to certain conditions. The amendments extend the expiration dates in the interim final rules to February 11, 2018. 

Exemptive Orders and No-Action Relief

Order Grants Limited Exemption from Rule 102 of Regulation M

On February 16th, the SEC’s Division of Trading and Markets issued an exemptive order that grants limited exemptions from Rule 102 of Regulation M relating to NPM Securities, LLC’s alternatives platform, solely to permit Tender Offer Funds to conduct tender offers, during a limited transition period, for their securities during the applicable restricted period even though periodic auctions of their securities also are conducted on the Alternatives Platform. This order also granted a limited exemption from Rule 102 to permit Master Funds and Feeder T funds to conduct tender offers for their securities during the applicable restricted period even though periodic auctions in the securities of the related Feeder A funds also are conducted on the Alternatives Platform. NPM Incoming Letter.

Trading and Markets Grants Limited Exemption from Regulation SHO’s Requirements on Net Long Positions and Ownership

The SEC’s Division of Trading and Markets issued an exemptive order on February 14th that grants a limited conditional exemption to Magnitude Capital LLC from the requirement in Rule 200(c) of Regulation SHO to have a net long position in a security to be deemed to own such security for purposes of Rule 200(c), subject to certain conditions. Magnitude requested the exemption to allow executing brokers to mark sell orders for sub-accounts of its Magnitude Special Investments Portfolio Fund (“MSIPF”) placed by Magnitude and certain third-party asset managers that manage certain sub-accounts on behalf of MSIPF based on MSIPF’s net position at a sub-account level.

Speeches and Statements

Piwowar Delivers Remarks at MoU Signing Between SEC and NASAA

On February 17th, SEC Acting Chairman Michael S. Piwowar delivered remarks at the signing of the Memorandum of Understanding (“MoU”) between the agency and the North American Securities Administrators Association (“NASAA”). Piwowar explained that the MoU will allow SEC staff and NASAA to share information about their observations of the various securities offering exemptions available to companies at the state and federal level.

Piwowar Updates Small and Emerging Advisory Committee on New Advocate Office

In remarks to the SEC Advisory Committee on Small and Emerging Companies on February 15th, Michael Piwowar provided an update on the new Office of the Advocate for Small Business Capital Formation and the search for the new Advocate for Small Business Capital Formation Advocate for Small Business Capital Formation. Piwowar noted that the Congress passed the Small Business Advocate Act of 2016 in December to establish the new Office and Advocate. Also see Commissioner Kara Stein Remarks.

Other Developments

FAQs on IM Guidance Update 2016-08 (Mutual Fund Fee Structures)

On February 15th, the staff of the Division of Investment Management prepared responses to questions regarding IM Guidance Update 2016-06 that relates to mutual fund fee structures.These FAQs also clarify disclosure matters associated with the staff’s January 2017 interpretive letter to the Capital Group.

Investor Advisory Committee to Hold Public Meeting

The SEC’s Investor Advisory Committee will meet on March 9, 2017, to discuss, among other things, SEC investor research initiatives, the Financial Industry Regulatory Authority’s (“FINRA”) 2016 Financial Capability Study, academic research on financial literacy, and unequal voting rights of common stock. Written statements to the Committee should be submitted on or before March 9, 2017. SEC Meeting Notice.

EDGAR Updates

On February 13th, the SEC released the Draft EDGAR Filer Manual (Volume I) General Information (Version 27), the Draft EDGAR Filer Manual (Volume II) EDGAR Filing (Version 41), the Draft EDGAR X-17A-5 XML Technical Specification (Version 3.0), the Draft EDGAR Form TA XML Technical Specification (Version 1.0), the Draft EDGAR N-MFP2 XML Technical Specification (Version 2.0), the Draft EDGAR Reg A XML Technical Specification (Version 1.4), and the Draft EDGAR ABS XML Technical Specification (Version 1.6).

Commodity Futures Trading Commission

DSIO Issues No-Action Transition for March 1, 2017 Compliance Date for Variation Margin and No-Action Relief from Minimum Transfer Amount Provisions

On February 13th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced that its Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued a no-action letter stating that, from March 1, 2017 to September 1, 2017, DSIO will not recommend an enforcement action against a swap dealer (“SD”) for failure to comply with the variation margin requirements for swaps that are subject to a March 1, 2017 compliance date. DSIO also issued a no-action letter stating that it will not recommend an enforcement action against an SD that does not comply with the minimum transfer amount requirements of CFTC Regulations 23.152(b)(3) or 23.153(c) with respect to one or more swaps with any legal entity that is the owner of more than one separately managed account. See Q&A – Time-Limited Staff No-Action Letter for Failure to Collect and/or Post Variation Margin under Commission Regulation 23.153. Also see Statement of CFTC Acting Chairman J. Christopher Giancarlo Concerning No-Action Relief for March 1, 2017 Implementation of Variation Margin on Uncleared Swaps.

Federal Rules Effective Dates

February 2017 – April 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

SEC Approves CBOE’s Proposed Amendments on the Adjustment and Nullification of Options Transactions

On February 14th, the SEC issued an order approving a proposed rule change filed by the Chicago Board Options Exchange Incorporated (“CBOE”) that will amend its rules on the nullification and adjustment of options transactions by adding an interpretation and policy related to the adjustment and nullification of erroneous complex order and stock-option order transactions. SEC Release No. 34-80040.

CBOE Proposes to List Certain Option Contract Expirations Non-Consecutively

On February 14th, the SEC requested comments on a proposed rule change filed by CBOE that would amend its rules on the terms of index options contracts to allow CBOE to list P.M.-settled options on broad-based indexes that expire on the last trading day of the month and Weekly Expirations non-consecutively. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 20, 2017. SEC Release No. 34-80037.

Chicago Stock Exchange

CHX Proposes Liquidity Enhancing Access Delay

On February 14th, the SEC provided notice of the Chicago Stock Exchange Inc.’s (“CHX”) proposal to adopt the CHX Liquidity Enhancing Access Delay, which will require all new incoming orders, cancel and cancel/replace messages to be subject to a 350-microsecond intentional access delay, subject to certain conditions. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of February 20, 2017. SEC Release No. 34-80041.

Financial Industry Regulatory Authority

FINRA Adopts Amendments to Customer Confirmations Rule

On February 15th, the Financial Industry Regulatory Authority (“FINRA”) announced that the SEC approved amendments to FINRA Rule 2232 (Customer Confirmations) that require member firms to disclose additional transaction-related information to retail customers for trades in certain fixed income securities. The amended rule requires a member to disclose the amount of mark-up or mark-down it applies to trades with retail customers in corporate or agency debt securities if the member also executes an offsetting principal trade in the same security on the same trading day. The amended rule also requires members to disclose two additional items on all retail customer confirmations for corporate and agency debt security trades: a reference, and a hyperlink if the confirmation is electronic, to a web page hosted by FINRA that contains publicly available trading data for the specific security that was traded; and the execution time of the transaction, expressed to the second. These amendments will become effective on May 14, 2018. FINRA Regulatory Notice 17-08.

FINRA Publishes Free Recording of Workshop on TRACE Reporting of Treasury Securities Transactions

On February 14th, FINRA made available a recording of its first phone-in workshop on the reporting of transactions in the U.S. Treasury securities via the Trade Reporting and Compliance Engine (“TRACE”). The workshops are designed to assist firms in complying with the initiative ahead of the July 10, 2017, compliance date. FINRA Press Release.

ICE Clear Credit

ICE Clear Europe Proposes Amendments to Clearing Rules on Resolution Proceedings

On February 9th, the SEC requested comments on a proposed rule change filed by ICE Clear Europe Limited (“ICE Clear Europe”) that would modify its clearing rules to clarify the application of certain default provisions in the event of a resolution proceeding with respect to the Clearing House or a Clearing Member. Comments should be submitted on or before March 2, 2017. SEC Release No. 34-79999.

International Securities Exchange

SEC Approves ISE’s Proposed Amendments to Order Protection Rules

On February 10th, the SEC approved the International Securities Exchange LLC’s (“ISE”) proposal to amend its rules, in preparation for a system migration to Nasdaq INET technology, to provide that if a trading halt is initiated during the exposure period, the exposure period will terminate without execution. SEC Release No. 34-80009.

SEC Approves ISE Gemini’s Rule Amendments Related to System Migration to Nasdaq

On February 10th, the SEC approved a proposal filed by ISE Gemini LLC (“ISE Gemini”) to amend various exchange rules in connection with a system migration to Nasdaq INET technology.  SEC Release No. 34-80011.

Municipal Securities Rulemaking Board

MSRB Report Examines Timing of Continuing Disclosure

The Municipal Securities Rulemaking Board (“MSRB”) published a report that analyzes the submissions of annual financial information and audited financial statements to the MSRB’s Electronic Municipal Market Access (“EMMA”) website in an effort to assess the timeliness with which municipal securities issuers and other obligated persons make their audited financials available to the public. The report found that the timing of submissions was consistent with previous years, averaging approximately 199 calendar days after the end of the applicable fiscal year. MSRB Press Release.

NASDAQ OMX Group

SEC Approves NASDAQ Exchanges Proposal to Accept ISE Options Orders

On February 9th, the SEC approved a proposed rule change filed by NASDAQ BX Inc. (“BX”), The NASDAQ Stock Market LLC (“Nasdaq”), and NASDAQ PHLX LLC (“Phlx”) that will permit the exchanges to accept options orders routed inbound from ISE, ISE Gemini, and ISE Mercury LLC (“ISE Mercury”) by Nasdaq Execution Services LLC. SEC Release No. 34-79996.

NYSE

SEC Seeks Comments on Proposed Change to Rule 104

On February 15th. the SEC requested comments on a proposed rule change filed by the New York Stock Exchange LLC (“NYSE”) that would approve or disapprove a proposed rule change amending Rule 104 to Delete Subsection (g)(i)(A)(III) prohibiting Designated Market Makers (“DMM”) from establishing, during the last 10 minutes of trading before the close, a new high (low) price for the day on the Exchange in a security in which the DMM has a long (short) position. Comments should be submitted by 21 days after publication in the Federal Register and rebuttal comments should be submitted by 35 days after publication in the Federal Register. SEC Release No. 34-80044.

SEC Takes More Time to Consider NYSE’s Proposal on SPAC Listing Standards

On February 10th, the SEC designated March 29, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding the NYSE’s proposal to amend its listing standards for Special Purpose Acquisition Companies (“SPAC”) to no longer require a shareholder vote, to refine existing procedures to affect business combination, and to adjust the quantitative requirements for initial and continued listing. SEC Release No. 34-80022.

SEC Seeks Comments on NYSE Proposed Changes to Rule 98 on DMMs and Related Products

On February 10th, the SEC requested comments on a proposed rule change filed by NYSE that would amend Rule 98 to provide that, while on the Trading Floor, DMMs must trade DMM securities at their assigned stock trading post location and may not trade any security that is a related product of their DMM securities. Comments should be submitted on or before March 9, 2017. SEC Release No. 34-80019.

SEC Designates Longer Period to Consider NYSE’s Proposed Changes to Co-Location Services and Connectivity Fees

On February 9th, the SEC designated April 14, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE’s proposal to provide additional information regarding access to various NYSE trading and execution services and establish fees for connectivity to certain NYSE market data feeds and to provide and establish fees for these services, including connectivity to data feeds from third party markets and other content service providers; access to the trading and execution services of Third Party markets and other content service providers; connectivity to Depository Trust & Clearing Corporation services; connectivity to third party testing and certification feeds; and the use of virtual control circuits by Users in the Data Center. SEC Release No. 34-80002.

Industry News

Acting SEC Chair Explains Campaign to Push Trump’s Deregulatory Agenda

In what The Wall Street Journal on February 15th called “a major exertion of authority for a position usually seen as a short-term caretaker,” SEC acting chairman Michael Piwowar is jumpstarting Trump’s deregulatory agenda by halting unfinished Dodd-Frank requirements and opening the door to scaling back some completed rules he says are “politicized.”