Insights from Winston & Strawn

SEC Chairman Clayton Testimony Provides Guidance on SEC Priorities

SEC Chairman Jay Clayton testified on June 27 to the Senate Appropriations Committee’s Legislative Branch Subcommittee.  He said that the SEC will continue to focus on examination and enforcement activity as a way to “root out fraud and wrongdoing in our financial system”.  Therefore, more than 50% of the requested resources will be invested in the agency’s enforcement and examination programs.

One of the areas of focus for increased SEC examination will be investment advisers.  Chairman Clayton noted that the level of assets managed by registered investment advisers has more than tripled in the last 15 years.  As a result, the SEC has in the past shifted resources to increase the supervision of such advisers and expects to maintain or increase such allocation in the future.  The SEC is on track to perform 20% more exams of investment advisers in the current fiscal year over the prior year, expects to further increase that number by another 5% in the coming fiscal year, and expects that in order to properly supervise such market participants, the SEC will need to continue to increase examination coverage in each of the coming years.

Another area of particular focus for the SEC will be cybersecurity.  The Office of Compliance Inspections and Examinations (OCIE) is expected to review market participants for compliance with SEC rules and guidance designed to ensure that cybersecurity infrastructure is “secure and resilient.”

Chairman Clayton’s statements supporting maintenance of, or possibly increases in, inspection levels seem inconsistent with industry speculation, which has been widely publicized, that the SEC under Chairman Clayton would—in contrast to the “broken windows” policy enacted under prior SEC Commissioner Mary Jo White—be less focused on regulation and enforcement as it tried to encourage capital formation. 

Feature: SEC Expands JOBS Act by Allowing Private Companies to Confidentially File Draft Registration Statements before IPOs

In the first major policy announcement by new Securities and Exchange Commission (“SEC”) Chairman Jay Clayton, the SEC on June 29th announced that, effective July 10, 2017, its Division of Corporation Finance will allow all companies to submit draft registration statements relating to initial public offerings (“IPOs”) for non-public review, a program that was previously mainly only accessible by emerging growth companies under the JOBS Act. This non-public review program, which will be available for IPOs in addition to most offerings made in the first year after a company has entered the public reporting system, aims to decrease the possibility for extensive exposure to market fluctuations that can negatively affect the offering process and hurt existing public shareholders; reverse the sharp decline in IPOs; and give individual investors more access to smaller, prosperous companies.

Bill Hinman, Director of the Division of Corporation Finance, explained that this non-public review program will “foster capital formation, provide investment opportunities, and protect investors,” and added that it “makes it easier for more companies to enter and participate in our public company disclosure-based system.”

Until today, only smaller companies with gross revenues of $1 billion or less were permitted to confidentially file draft registration statements for review by the SEC before offerings.

Click here for FAQs on the Voluntary Submission Draft of Registration Statements, which includes questions and answers prepared by the Division of Corporation Finance to address preliminary questions about the expanded procedures. Questions answered include:

  • how an issuer that is unable to rely on Securities Act Section 6(e)(2) can submit its draft registration statement and indicate that it is doing so for nonpublic review;
  • how an issuer should convey its agreement with the public filing guidelines;
  • when an issuer that uses the expanded non-public submission process must publicly file its registration statement and what that issuer needs to file along with it; and
  • whether an issuer that submits a draft registration statement for nonpublic review may make a public communication about its offering.

FINRA – Regulatory Matters at a Glance

Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.

Banking Agency Developments


OCC Hosts Mutual Savings Association Advisory Committee Meeting July 25

The Office of the Comptroller of the Currency (“OCC”) announced that it will host a public meeting of the Mutual Savings Association Advisory Committee on Tuesday, July 25, 2017 to advise the OCC on regulatory changes or other steps the agency may be able to take to ensure the continued health and viability of mutual savings associations and other issues of concern to mutual savings associations.

Revised General Policies and Procedures Booklet

On July 5th, the OCC announced the issuance of its “General Policies and Procedures” booklet of the Comptroller’s Licensing Manual. This booklet updates procedures and requirements to reflect the integration of the Office of Thrift Supervision into the OCC in 2011 and the issuance of revised regulations that became effective July 1, 2015.

First Quarter 2017 Bank Trading Revenue Increased to $7.1 Billion

On July 3rd, the OCC announced that trading revenue of U.S. commercial banks and savings associations increased to $7.1 billion in the first quarter 2017, $1.5 billion higher than the first quarter a year earlier. In the report, Quarterly Report on Bank Trading and Derivatives Activities, the OCC also noted that trading revenue in the first quarter 2017 grew 18% compared with the $6 billion reported in the fourth quarter 2016.

Branch Closings Booklet Issued

On June 29th, the OCC announced its issuance of the “Branch Closings” booklet of the Comptroller’s Licensing Manual. This revised booklet incorporates updated branch closing procedures and requirements following the integration of the Office of Thrift Supervision into the OCC in 2011 and the issuance of revised regulations that became effective July 1, 2015, addressing branch closings for both national banks and federal savings associations.

Federal Reserve

Payments Study Highlights Changes in Consumer and Business Payment Choice

On June 30th, the Federal Reserve Board (the “Board”) announced the release of its 2016 Federal Reserve Payments Study.

Board Releases Annual Determination of Aggregate Consolidated Liabilities of Financial Companies

On June 29th, the Board announced that it has released its annual determination of the aggregate consolidated liabilities of financial companies.

Board Releases Results of CCAR

On June 28th, the Board announced completion of its review of the capital planning practices of the nation's largest banks and did not object to the capital plans of all 34 bank holding companies participating in the Comprehensive Capital Analysis and Review (“CCAR”). However, the Board is requiring one firm to address weaknesses in its capital planning process and resubmit its capital plan by the end of 2017.

Treasury Department Developments

Treasury Department

Treasury Acts to Increase Economic Pressure on North Korea and Protect the U.S. Financial System

On June 29, the U.S. Department of the Treasury announced that it took multiple actions in response to North Korea’s continued evasion of international sanctions, development of weapons of mass destruction and the means of their delivery, and violations of UN Security Council resolutions.

Securities and Exchange Commission

Final Rules

Adoption of Updated EDGAR Filer Manual

On July 6, the SEC adopted revisions to the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) Filer Manual to reflect updates to the EDGAR system. Effective upon publication in the Federal Register, the updates primarily reflect amendments made to forms under the Securities Act of 1933 and the Securities Exchange Act of 1934 to effectuate inflation adjustments and other technical amendments required under Titles I and III of the JOBS Act; support recent updates to Form C and Form D; includes instructions for hyperlinking to exhibits included with certain Securities Act and Exchange Act forms; and makes certain corrective changes to previously revised sections. The EDGAR system is scheduled to be upgraded on July 17, 2017.

Other Developments

Report on Objectives for Fiscal Year 2018

On June 29, the SEC’s Office of the Investor Advocate published its report on objectives for fiscal year 2018. 

Commodity Futures Trading Commission

Final Rules

Commission Delegated Authority Provisions and Technical Amendments

On June 26, the Commodity Futures Trading Commission (“CFTC”) adopted final rules to establish new and amend certain existing delegations of authority to agency staff. The CFTC also adopted amendments to update statutory authority citations and correct limited typographical and technical errors in certain rules.

No-Action Relief and Exemptive Orders

Conditional Relief Issued from Reporting Fully Margined/Collateralized Binary Option and Spread Contract Data to Swap Data Repositories

On June 30, the CFTC’s Division of Market Oversight and Division of Clearing and Risk announced that they have provided no-action relief to a designated contract market (“DCM”) and a derivatives clearing organization (“DCO”) from reporting to swap data repositories data associated with binary option transactions executed on or subject to the rules of the DCM and cleared by the DCO.

Other Developments

Senate Agriculture Committee Votes to Confirm Giancarlo as Chairman

On June 29, the CFTC announced that the U.S. Senate Committee on Agriculture, Nutrition, and Forestry voted overwhelmingly to confirm the nomination of J. Christopher Giancarlo as CFTC Chairman. He has served as Acting Chairman since January.

Federal Rules Effective Dates

July 2017 – September 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

CBOE Withdraws Proposed Rule Change Related to Unusual Market Conditions

On June 30, the Chicago Board Options Exchange (“CBOE”) withdrew a proposed rule change to amend its rules regarding the circumstances in which CBOE Floor Officials may declare a “fast” market and the actions those Floor Officials may take when a fast market is declared, including the ability to suspend the duty to systemize a non-electronic order prior to representing it in open outcry trading. Release No. 34-81065.

Financial Industry Regulatory Authority

FINRA Proposes to Adopt CAT-Fee Dispute Resolution Rule

On June 29, the SEC published a notice on the Financial Industry Regulatory Authority’s (“FINRA”) proposal to adopt FINRA Rule 6898 (Consolidated Audit Trail – Fee Dispute Resolution) to establish the procedures for resolving potential disputes related to CAT Fees charged to Industry Members. Comments are due by July 27, 2017. Release No. 34-81053.

New Chairman of FINRA Board of Governors

On June 29, FINRA announced that it has elected as FINRA Chairman William H. Heyman, Vice Chairman and Chief Investment Officer of The Travelers Companies, Inc., effective July 18, 2017.

FINRA Provides Access to Recording of Workshop on TRACE Reporting of Transactions in U.S. Treasury Securities

FINRA has made available to FINRA members a free recording of its final phone-in workshop on the reporting of transactions in U.S. Treasury Securities to FINRA via the Trade Reporting and Compliance Engine (“TRACE”), which will be required beginning on July 10, 2017. The workshop reviews relevant rules and regulations, and discusses testing and other relevant technical information.

International Swaps and Derivatives Association

ISDA Publishes Three Videos on Benchmarks

On July 6, the International Swaps and Derivatives Association (“ISDA”) published the following three videos on benchmarks: “The Search for Alternative Risk-free Reference Rates”; “Identifying Robust Fallbacks for the IBORs”; and “The EU Benchmarks Regulation.”

ISDA Urges Market Participants to Obtain LEIs to Comply with Forthcoming Regulatory Requirements

On June 28, in coordination with the Global Financial Markets Association (“GFMA”), ISDA published information on new requirements under EU rules for all market participants to obtain a Legal Entity Identifier (“LEI”) in order to participate in certain financial transactions. 

Investors Exchange

Comments Sought on Proposal to Introduce a New Market Maker Peg Order

On July 5, the SEC sought comments on the Investors Exchange LLC’s (“IEX”) proposal to introduce a new Market Maker Peg Order. Comments on the proposal are due within 45 days of publication of the notice in the Federal Register. Release No. 34-81078.

SEC Delays Action on IEX’s Proposal on Modifying Manner in Which Exchange Opens Trading for Non-IEX-Listed Securities

On June 29, the SEC designated July 27, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding IEX’s proposal to modify the manner in which the Exchange opens trading for non-IEX-listed securities beginning at the start of Regular Market Hours and make related changes. Release No 34-81052.     

NYSE Arca, Inc.

SEC Designates Longer Period on Proposal to Amend Generic Listing Criteria Available to Index-Linked Securities

NYSE Arca, Inc. filed with the SEC a proposed rule change to amend the generic listing criteria applicable to Equity Index-Linked Securities. On July 6, the SEC designated August 21, 2017, as the date by which the agency should either approve or disapprove or institute proceedings to determine whether to disapprove the proposed rule change.

Industry News

Paul Volcker Comments on the Future of “Volcker Rule”

On July 7, Bloomberg reported that Paul Volcker is not concerned that the Trump administration will erode the general principle of the financial rule that was named after him. Volcker commented that the “basic premise” of the Volcker Rule “is hard to fight against.”     

The Digitization of Commodity Trading

On July 6, the Financial Times reported on how computer models and algorithmic programs are wielding a larger influence on commodities prices, while traders are attempting to keep up with the digital forces that are changing how raw materials are bought and sold. According to a recent report on the digitization of commodity trading, market participants who want to compete in this new environment must invest in trading infrastructure and personnel who focus on software development and mathematics.     

SEC Warns Companies to Watch How They Use Non-Standard Metric

The SEC has noted that free cash flow does not have a universal definition and added that companies should be careful to avoid “inappropriate or potentially misleading inferences” about the effectiveness of any free cash flow metric.     

SEC Hires Congress Liaison

On June 30, Bloomberg reported that SEC Chairman Jay Clayton has hired Bryan Wood, a former Republican staff member on the House Financial Services Committee, to act as a “point person” to manage the agency’s relationship with Congress.     

SEC Is Able to Detect Even the Smallest Illegal Market Activity

On June 30, Reuters reported that the SEC utilizes its advanced data analytics to help detect small cases, in an effort to serve as a reminder that even the smallest violations will not go unnoticed. The Reuters article also listed a review of the SEC’s enhanced capabilities and methods for gathering evidence of insider trading.