Insights from Winston & Strawn

As the Trump administration begins its first full week in the White House, regulatory uncertainty has hit multiple industries.  For example, the final rule issued by the U.S. Department of Labor (“DOL”) on fiduciary investment advice (“DOL fiduciary rule”) has been the subject of much debate.  As discussed more fully below, the final rule is currently set to take effect on April 10, 2017, and requires financial advisers to act in the best interest of their clients in 401(k), individual retirement accounts and other eligible accounts.  Staunch critics of the DOL fiduciary rule argue that it is excessively onerous and increases the costs associated with giving and receiving advice, while advocates of the rule claim that requiring brokers to act in the best interests of their clients is necessary to protect brokers from selling high-fee investments that eat into their clients’ retirement savings.

With a new administration, proposals have been made to delay, replace, or even abandon the DOL fiduciary rule.  These proposals range from a bill recently introduced in the House of Representatives to vigorous lobbying by the U.S. Chamber of Commerce.  According to The Wall Street Journal, some industry insiders are expecting a two-year delay in implementation of the DOL fiduciary rule, while certain lobbyists expect a six-month delay that could give Congress time to revoke the regulation entirely.

Even the Obama administration planned to ease restrictions under the final rule on certain annuity sellers.  In the final hours of that administration, a new exemption was proposed for certain insurance intermediaries that have averaged a minimum of $1.5 billion in annual fixed annuity sales over each of the three prior years, a threshold the DOL says is intended to identify firms that have the financial stability and operational capacity to implement policies preventing conflicts of interest.  Though the future of the DOL fiduciary rule remains uncertain, the rule may likely see further changes before going into effect.

Feature: Update on Department of Labor's Fiduciary Rule

On January 13th, the DOL’s Employee Benefits Security Administration released a second set of frequently asked questions (“FAQs”) concerning the application of the conflict of interest final rule on fiduciary investment advice (“DOL fiduciary rule”), which takes effect on April 10, 2017, and requires financial advisers to act in the best interest of their clients in 401(k), individual retirement accounts and other eligible accounts. Similar to the first set of FAQs that the DOL published in October 2016, which addressed new prohibited transaction exemptions and amendments to existing exemptions, the second set of FAQs focuses mainly on specific technical compliance questions brought up by plan service providers concerned about, among other things, distinguishing between fiduciary and non-fiduciary communications.

At the same time, the DOL published Consumer Protections for Retirement Investors – FAQs on Your Rights and Financial Advisers, a 16-page document that contains questions for investors to ask their advisers based on the DOL fiduciary rule’s requirements. Among other things, the Consumer Protections for Retirement Investors document maps out how the best interest standard (also referred to as the “Best Interest Contract”) between the financial advisers and the investors would actually be applied. The FAQs note that while the best interest standard requires the adviser to act “prudently” and to put the investor’s interests first, the investor cannot sue the adviser simply because an investment loses money. The FAQs add that the best interest standard “focuses on the financial adviser’s behavior at the time he or she makes a recommendation to [the investor], rather than how the investment in [the investor’s] retirement account turned out.” The document specifies that the adviser’s “obligation is not perfection, but rather to make recommendations that adhere to a professional standard of care and that are based on [the investor’s] financial interest, without regard to his or her own competing financial interests.”

Knut Rostad, president of the Institute for the Fiduciary Standard, applauded the effort made by the Consumer Protections for Retirement Investors document, commenting that it “is an excellent first cut at boiling 1,000 pages [of the DOL fiduciary rule] down to 16 pages” but he surmised that “one client in 1,000 will read the FAQs” and suggested that advisers “use this document to boil it down to two or three pages that are accessible and meaningful to investors.”

Staunch critics of the DOL fiduciary rule argue that it is excessively onerous and makes it more costly to give and receive advice, while advocates of the rule contend that requiring brokers to act in the best interests of their clients is necessary to protect brokers from selling high-fee investments that eat into their clients’ retirement savings.

With a new administration in the White House, many are wondering if and when the DOL fiduciary rule itself will be affected. Representative Joe Wilson (R-S.C.), a member of the House Committee on Education and the Workforce, recently introduced a bill that would delay the DOL fiduciary rule for two years, with the ultimate goal of ditching the legislation altogether. Industry groups are on board with Rep. Wilson’s bill, contending that the compliance costs are too high. And, according to InvestmentNews, the U.S. Chamber of Commerce has been calling on Trump to delay the DOL fiduciary rule and then work with the business community to replace it with a different investment advice rule. Barbara Roper, director of investor protection at the Consumer Federation of America, does not think that it will be so easy to simply stop the DOL fiduciary rule because the administration would have to “go through a notice and comment process, including economic analysis” while following Administrative Procedure Act rules. She added, “[t]he longer the delay, the more extensive that process and analysis would be.” According to The Wall Street Journal, Kapin Vora, head of wealth management at consulting firm Capco, anticipates a two-year delay in implementation of the DOL fiduciary rule and notes that approximately half of his clients affected by the rule have recently either completely frozen or decelerated attempts to become compliant.

On January 19th, InvestmentNews reported on Senator Elizabeth Warren’s (D-Mass.) recent challenge to financial firms that have already begun complying with the DOL fiduciary rule. In a 99-page letter sent to the firms, Sen. Warren urged that they resist possible Trump administration efforts to delay the rule’s enactment. Sen. Warren ended the letter requesting a response to six questions, noting that she “wanted to find out whether [the financial firms] will support the next administration’s efforts to reverse the significant progress [their] company, and many companies industrywide, have already made toward meeting this higher standard.”

Banking Agency Developments

OCC

Revision of Small and Intermediate Small Bank and Savings Association Asset Thresholds

On January 19th, the Office of the Comptroller of the Currency (“OCC”) announced its publication in the Federal Register of revisions to its Community Reinvestment Act regulations that became effective on January 18, 2017. The revisions adjust the asset-size threshold amounts used to define “small bank,” “small savings association,” “intermediate small bank,” and “intermediate small savings association.” The rulemaking adjusts the threshold amounts based on the annual percentage change in a measure of the consumer price index.

Revised Comptroller’s Licensing Manual Booklet

On January 19th, the OCC announced that it has issued the “Conversions to Federal Charter” booklet of the Comptroller’s Licensing Manual.

OCC Begins Roll-Out of Web-Based System for Licensing and Public Welfare Investment Filings

On January 17th, the OCC announced its launch of the Central Application Tracking System, the agency’s new web-based system for banks to file licensing and public welfare investment applications and notices.

Comment Period Extended for ANPR on Enhanced Cyber Risk Management Standards

On January 13th, the Federal Reserve Board, the OCC, and the Federal Deposit Insurance Corporation (“FDIC”) announced that they have extended until February 17, 2017, the comment period for the advance notice of proposed rulemaking (“ANPR”) on enhanced cyber risk management standards for large and interconnected entities under their supervision and those entities’ service providers. The agencies are considering five categories of cyber standards:  cyber risk governance; cyber risk management; internal dependency management; external dependency management; and incident response, cyber resilience, and situational awareness. Comments were originally due by January 17, 2017.

Federal Reserve

Finalized Rule Adjusting Board’s Maximum Civil Money Penalties

On January 18th, the Federal Reserve Board announced that it has finalized a rule adjusting the Board’s maximum civil money penalties. The final rule increases the maximum civil money penalty limits for 2017 by the amount required by law. The new penalty amounts applied as of January 15, 2017.

Securities and Exchange Commission

Guidance

Corporation Finance Offers Guidance to Small Entities on Rule 504 of Regulation D

On January 20th, the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance published a guide for small entities on compliance requirements under Rule 504 of Regulation D, which offers an exemption from registration under the Securities Act for the offer and sale of up to $5,000,000 of securities in a 12-month period. Among other things, the compliance guide discusses eligibility requirements, required notices, and the general prohibition on general solicitation and issuance of restricted securities.

Investment Management Revises FAQs on Form PF

On January 18th, the SEC’s Division of Investment Management updated its FAQs on Form PF, the reporting form for private fund advisers. The revised FAQs include additional information regarding general filing requirements and specific questions of the form, some of which relate to amendments to the form made pursuant to the 2014 Money Market Fund Reform. Investment Management Information Update.   

Exemptive Orders

SEC Extends Temporary Exemptions for Security-Based Swaps

The SEC issued an order on January 18th that extends until February 5, 2018, the temporary exemptive relief provided in connection with the revision of the definition of “security” in the Securities Exchange Act to encompass security-based swaps that generally was not directly related to a specific security-based swap rulemaking. The SEC also requested comments on whether it is necessary to continue the exemptive relief beyond February 5, 2018.   

Speeches and Statements

White Calls for SEC to Maintain Its Independence

In remarks at The Economic Club of New York on January 17th, outgoing SEC Chair Mary Jo White emphasized the need for the SEC to maintain a “fierce independence” and immunity from political pressure as it carries out its work as a market regulator following the financial crisis. White criticized legislative proposals from Congress that would require the SEC to conduct additional economic analyses prior to approving new rules, maintaining that the proposal would provide no benefit to investors and would prevent the SEC from responding quickly to another market crisis.

Other Developments

SEC Enters Expanded Supervisory MOU with Hong Kong’s Securities Regulator

On January 19th, the SEC announced that it has signed a memorandum of understanding (“MOU”) with the Hong Kong Securities and Futures Commission (“SFC”). The agreement, which expands upon a 1995 MOU,  establishes a supervisory cooperation arrangement to facilitate the sharing of information between the two regulators about regulated entities operating in the U.S. and Hong Kong, including investment advisers, broker-dealers, securities exchanges, market infrastructure providers, and credit rating agencies.

Staff Announcements

The SEC announced on January 19th that Andrew J. “Buddy” Donohue, the SEC’s Chief of Staff, will leave the SEC at the end of the month. The SEC also announced that Jennifer A. Diamantis has been appointed to serve as Chief of the Enforcement Division’s Office of Market Intelligence. On January 18th, the SEC announced that SEC General Counsel Anne K. Small plans to leave the agency later in January. According to another announcement, SEC Deputy Chief of Staff Nathaniel Stankard is also leaving the agency.

Investment Management Releases December 2016 Money Market Fund Statistics

On January 19th, the SEC’s Division of Investment Management published updated money market fund statistics. The updated statistics include data as of December 31, 2016.

Commodity Futures Trading Commission

Proposed Rules

Federal Register Publication: Proposal to Amend Recordkeeping Obligations

On January 19th, the Commodity Futures Trading Commission’s (“CFTC”) proposed rules to amend recordkeeping requirements were published in the Federal Register. Comments on the proposal are due by March 20, 2017.

CFTC Approves Proposals on Swaps Data and Other Amendments

On January 13th, the CFTC announced that it has unanimously approved proposed changes to swap data rules that implement Congressional action to remove indemnification requirements for the use of swap data by other regulators. In a separate proposal, the CFTC voted to update Parts 3 and 9 to integrate existing advisory guidance, incorporate swap execution facilities, and update provisions currently applicable to designated contract markets. The comment period will be open for 60 days after publication in the Federal Register. See Fact Sheet: Proposed Amendments to Rules Relating to Swap Data Access by Certain Foreign and Domestic Authorities. Also see Massad Statement on Proposed Amendments to Swap Data Access Provisions.    

Other Developments

Enforcement Division Issues New Advisories on Cooperation

On January 19th, the CFTC’s Division of Enforcement announced that it has issued two new Enforcement Advisories outlining the factors the Enforcement Division will consider in evaluating cooperation by individuals and companies in the agency’s investigations and enforcement actions.

Enforcement Director to Leave CFTC

On January 19th, CFTC Chairman Timothy Massad announced that Division of Enforcement Director Aitan Goelman will leave the agency on February 3, 2017.

Federal Rules Effective Dates

January 2017 – March 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

BATS Global Markets

SEC Takes More Time to Consider BZX’s Proposed Changes to Listing Standards for Exchange-Traded Products

On January 18th, the SEC designated March 7, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning Bats BZX Exchange Inc.’s (“BZX”) proposed rule change to amend its listing rules relating to exchange-traded products to add additional continued listing standards and to incorporate certain changes to its rule on the failure to meet listing standards. SEC Release No. 34-79839.

EDGX Proposes to Make Permanent Pilot Elements of Its Price Improvement Mechanism

On January 18th, the SEC requested comments on a proposed rule change filed by Bats EDGX Exchange, Inc. (“EDGX”) that would make permanent the aspect of the price improvement mechanism operated by EDGX’s equity options platform that currently operates on a pilot basis. The pilot concerns the fact that there is no minimum size requirement for orders to be eligible for the price improvement mechanism auction. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 23, 2017. SEC Release No. 34-79838.    

BOX Options Exchange

SEC Approves BOX’s Proposal on Eligibility Requirements and Pilot Programs for Price Improvement Period Auction

On January 18th, the SEC approved BOX Options Exchange LLC’s (“BOX”) proposed rule change that will amend the eligibility requirements for its Price Improvement Period auction (“PIP”) and make permanent pilot programs for the PIP and Complex Order Price Improvement Period (“COPIP”) programs that allow BOX to have no minimum size requirements for orders. SEC Release No. 34-79831.  

Chicago Board Options Exchange

SEC Grants Accelerated Approval to CBOE’s Proposal to Make Permanent Components of AIM Operating on a Pilot Basis

On January 18th, the SEC issued an order granting accelerated approval to the Chicago Board Options Exchange Incorporated’s (“CBOE”) proposed rule change that will make permanent the aspects of its Automated Improvement Mechanism (“AIM”) that are currently operating on a pilot basis. The SEC also requested comments on CBOE’s amendment to the proposal, which describes additional data relating to complex orders submitted through AIM and provides additional support for its proposal to approve the aspects of AIM currently operating on a pilot basis as applicable to complex orders. Comments on the amendment should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 23, 2017. SEC Release No. 34-79836.   

Financial Industry Regulatory Authority

FINRA Solicits Feedback on Potential Implications of Blockchain

In a report published on January 18th, the Financial Industry Regulatory Authority (“FINRA”) offered an overview of distributed ledger technology (“DLT”), otherwise known as blockchain. The report emphasized key applications of blockchain technology and examined implementation and regulatory considerations for broker-dealers. FINRA also requested comments on the report in an effort to obtain feedback on any challenges associated with the use and implementation of DLT. Comments should be submitted on or before March 31, 2017.      

ICE Clear Credit

SEC Designates Longer Period to Consider ICC’s Proposal to Clear Additional CDS Contracts

On January 18th, the SEC designated February 24, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding ICE Clear Credit LLC’s (“ICC”) proposed rule change that would provide for the clearance of additional credit default swap (“CDS”) contracts, including Standard Australian Corporate Single Name CDS contracts and Standard Australian Financial Corporate Single Name CDS contracts. SEC Release No. 34-79821.     

International Securities Exchange

SEC Approves ISE Exchanges’ Proposals on Eligibility Requirements and Pilot Programs for the Price Improvement Mechanism

On January 18th, 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 by revising the eligibility requirements for their Price Improvement Mechanisms (“PIMs”) for certain Agency Orders of less than 50 option contracts and making permanent those aspects of the PIM that are currently operating on a pilot basis, which include the early conclusion of the PIM and no minimum size requirement of orders.      

International Swaps and Derivatives Association

ISDA Analyzes IRD and CDS Index Trading during 2016 Q3

On January 13th, the International Swaps and Derivatives Association published a research note that analyzes interest rate derivatives (“IRD”) and CDS index trading activity for the third quarter of 2016 in an effort to assess the impact of regulatory change on swap execution facility (“SEF”) and bilateral trading volumes, as well as cleared and non-cleared activity.    

Municipal Securities Rulemaking Board

SEC Approves MSRB’s Amendments to Customer Complaint Rules

On January 13th, the SEC granted accelerated approval to the Municipal Securities Rulemaking Board’s (“MSRB”) proposal to extend the MSRB’s customer complaint rules and related recordkeeping requirements to all municipal advisors and to modernize those rules. The SEC also requested comments on the MSRB’s amendment to the proposal, which clarifies the definition of municipal advisory client. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 23, 2017. SEC Release No. 34-79801.  In a separate Regulatory Notice, the MSRB announced that the rule amendments will become effective on October 13, 2017.    

NASDAQ OMX Group

SEC Accelerates Approval of Phlx’s Proposals on Price Improvement Auction

On January 18th, the SEC issued an order granting accelerated approval to the NASDAQ PHLX LLC’s (“Phlx”) proposal to amend the eligibility requirements for its Price Improvement XL mechanism (“PIXL”) for PIXL auctions involving less than 50 contracts and make permanent those aspects of PIXL that are currently operating on a pilot basis, which include auction eligibility for Complex Orders in a PIXL Auction; the provision that an unrelated market or marketable limit order on the opposite side of the market from the PIXL Order received during the Auction will not cause the Auction to end early and will execute against interest outside of the Auction; the early conclusion of a PIXL Auction; and no minimum size requirement of orders entered into PIXL. SEC Release No. 34-79835.

SEC Approves BX’s PRISM Auction Changes

On January 17th, the SEC approved NASDAQ BX Inc.’s (“BX”) proposed rule change to amend the eligibility requirements for its Price Improvement Auction mechanism (“PRISM”) for certain PRISM Orders of less than 50 option contracts and make permanent those aspects of the PRISM auction that are currently operating on a pilot basis.  SEC Release No. 34-79812.

SEC Takes More Time to Consider Nasdaq’s Proposed Extended Life Priority Order Attribute

On January 17th, the SEC designated March 5, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding The Nasdaq Stock Market LLC’s (“Nasdaq”) proposed rule change to adopt a new Extended Life Priority Order Attribute. SEC Release No. 34-79810.

SEC Approves Phlx’s Proposal on Sub-MPV Split-Price Orders

On January 17th, the SEC granted accelerated approval to Phlx’s proposed rule change to provide an additional exception to the mandatory use of the Phlx’s Floor Broker Management System (“FBMS”) that would permit Floor Brokers to execute certain sub-minimum price variation (“sub-MPV”) split-price orders in the trading crowd. SEC Release No. 34-79805.     

National Futures Association

NFA Offers Guidance on Rule Amendments Affecting the Timing of CCO Annual Report Filing

On January 18th, the National Futures Association (“NFA”) issued a Notice advising members of changes to the timing of chief compliance officer (“CCO”) annual report filing requirements for futures commission merchants (“FCM”) and swap dealers (“SDs”). According to the Notice, FCMs and SDs have up to 90 days after their fiscal year-end to file their CCO annual report.     

NYSE

SEC Approves NYSE MKT’s Proposed Changes to Its CUBE Auction

On January 18th, the SEC issued an order granting accelerated approval to a proposal filed by NYSE MKT LLC (“NYSE MKT”) that will amend certain eligibility requirements of the rules that govern its Customer Best Execution Auction (“CUBE Auction”) and to make permanent the provisions of rules that currently operate on a pilot basis. SEC Release No. 34-79830.

NYSE Arca Proposes Amendments to Listing Standards for Exchange-Traded Products

On January 18th, the SEC requested comments on a proposal filed by NYSE Arca, Inc. (“NYSE Arca”) that would add additional continued listing standards as well as clarify the procedures it will undertake when an exchange-traded product is noncompliant with applicable rules. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 23, 2017. SEC Release No. 34-79834.     

Options Clearing Corporation

OCC Proposes Amendments to Margin Coverage During Increased Market Volatility

On January 18th, the SEC provided notice of a proposed rule change filed by The Options Clearing Corporation (“OCC”) that would modify the current process for systematically monitoring market conditions and performing adjustments to its margin coverage when current market volatility increases beyond historically observed levels. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of January 23, 2017. SEC Release No. 34-79818.

Industry News

Recent IPO Pitches Might Indicate Growth

Nine companies just this week began to pitch their IPOs to potential investors, marking the most IPOs pitched in one week since 13 companies did so in 2015. According to Dealogic, last year was the slowest for U.S.-listed IPOs since 2003 in terms of money raised, but the companies that went public performed well. Kevin Landis, portfolio manager of the Firsthand Technology Value Fund, commented that a “good growth story is a rare commodity, and an IPO represents that.” The Wall Street Journal.    

Blockchain Technology Could Potentially Save Investment Banks Billions

According to an Accenture report, Blockchain technology could help the world’s largest investment banks cut their infrastructure costs by between $8 and $12 billion per year by the year 2025. Reuters.