Insights from Winston & Strawn

You will find in this week’s Financial Services Update a feature about the recent report issued by the U.S. Department of Treasury signifying the possible future rollback of Dodd-Frank regulation.  One of the many issues addressed in the U.S. Treasury Report was a focus on “improving the Volcker Rule.”

By way of background, the Volcker Rule, prohibits banks from engaging in speculative or proprietary trading and limits their investment in certain hedge funds and private equity funds. The Rule was adopted in January 2014 and banks have been required to comply with most provisions since July 2015.

The U.S. Treasury Report concludes that changes to the Volcker Rule “are necessary to clarify the rule’s prohibitions, reduce unnecessary compliance burdens and promote market making and other economically important activities.”  The Report proposes that highly capitalized banks should be able to take an “off ramp” from the Volcker Rule altogether, since increased capitalization can mitigate risks posed by proprietary trading.  It also proposes exemption from some aspects of the Rule, such as stress testing, for smaller or community banks.

The Volcker Rule has always been a contentious issue in Washington, as recently illustrated by the House’s passing of the Financial CHOICE Act, which included a proposal to eliminate the Volcker Rule altogether.  The Volcker Rule has become something of a poster child for Dodd-Frank regulation.  Although the U.S. Treasury report is only the first of four reports expected to be delivered as part of President Trump’s February executive order, it seems clear that reform of the Volcker Rule will be an important and symbolic step for the current Administration’s loosening of financial regulations generally.

Feature: U.S. Treasury Proposes Financial Reforms in Report

On June 12th, the U.S. Department of the Treasury announced that it has issued a report entitled A Financial System That Creates Economic Opportunities, the agency’s first in a series of four reports in response to President Trump’s February executive order in which he vowed to do a “big number” on the Dodd-Frank reform law.The nearly 150-page report, a result of months of discussions with the financial industry and other stakeholders, was drafted in an effort to ease regulatory burdens on Wall Street giants as well as small and midsize banks.

Included in the report are proposed changes to financial regulations, such as expansion of the authority of the Financial Stability Oversight Council (“FSOC”); modernization of the Community Reinvestment Act; the exemption of some smaller banks from regulatory burdens; recommendation for greater exemptions from the so-called Volcker Rule; and a reduction to the annual stress tests on the big banks to a two-year schedule. The report also proposed substantially stripping the Consumer Financial Protection Bureau (“CFPB”) of its powers, contending that the agency’s “unaccountable structure and unduly broad regulatory powers have led to predictable regulatory abuses and excesses.” The report further added that the CFPB’s “approach to rule making and enforcement has hindered consumer access to credit, limited innovation and imposed unduly high compliance burdens, particularly on small institutions.”

In defense of the report’s sweeping financial reforms, U.S. Treasury Secretary Steven T. Mnuchin said at a June 12th congressional hearing that “[p]roperly structuring regulation of the U.S. financial system is critical to achieve the administration’s goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy.” He added that the Trump administration is “focused on encouraging a market environment where consumers have more choices, access to capital and safe loan products – while ensuring taxpayer-funded bailouts are truly a thing of the past.” In congratulating the House on passing the Financial CHOICE Act, Mnuchin noted that the report “focuses on solutions the Executive Branch can execute through regulatory changes and executive actions” and said that he looks forward to working on a parallel track with Congress to provide swift relief, particularly to community banks.” However, according to The New York Times, the Trump administration cannot unilaterally roll back the Dodd-Frank law, although the president does have wide-ranging power to define how Dodd-Frank’s rules are executed.

Reactions to the report were mixed. Reform advocates and consumer groups criticized the plan, while those in the financial industry lauded it. Senator Elizabeth Warren (D-Mass.) commented that the plan, if implemented, would “make it easier for big banks to cheat their customers and spark another financial meltdown,” whereas Tim Pawlenty, chief executive of the Financial Services Roundtable, praised the plan as “an important step towards modernizing America’s financial regulatory system so both economic growth and consumer protection are advanced.”

To complete the series, subsequent reports on capital markets; clearing houses and derivatives; the insurance and asset management industries; financial innovation; and banking technology will be issued in the coming months.

Banking Agency Developments


OCC Hosts Operational Risk Workshop in West Virginia

The Office of the Comptroller of the Currency (“OCC”) announced that it will host a workshop in Charleston, W.V., at the Holiday Inn & Suites Charleston West on July 25th for directors of national community banks and federal savings associations supervised by the OCC. The Operational Risk workshop will focus on the key components of operational risk (people, processes, and systems). The workshop will also cover governance, third-party risk, vendor management, and cybersecurity.      

Federal Reserve

Federal Reserve Approves Action by Boards of Directors of the Federal Reserve Banks of NY, St. Louis, and Minneapolis

On June 15th, the Federal Reserve announced that it has approved actions by the Boards of Directors of the Federal Reserve Banks of New York, St. Louis, and Minneapolis, increasing the discount rate (the primary credit rate) at the banks from 1-1/2 percent to 1-3/4 percent, effective immediately.

Federal Open Market Committee Statement, Projections, and Addendum

On June 14th, the Federal Reserve issued a statement on the Federal Open Market Committee (“FOMC”). The Board and the FOMC also released economic projections from the June 13-14 FOMC meeting. Additionally, the FOMC issued an addendum to its Policy Normalization Principles and Plans.     


CFPB Seeks Comment on Proposed Changes to Prepaid Rule

On June 15th, the Consumer Financial Protection Bureau (“CFPB”) announced that it is seeking comment on proposed updates to its prepaid rule. The proposal would adjust error resolution requirements and provide more flexibility for credit cards linked to digital wallets.Comments on the proposal will be due 45 days after the proposal is published in the Federal Register.     

Treasury Department

Treasury Sanctions Iraq-Based ISIS Financial Facilitation Network

On June 15th, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced that it took action to disrupt an ISIS financial facilitation network by designating one individual and one entity pursuant to Executive Order 13224, which targets terrorists and those providing support to terrorists or acts of terrorism.

Securities and Exchange Commission


Investment Management Updates FAQs on Form ADV and IARD

In an Information Update published on June 12th, the Securities and Exchange Commission’s (“SEC”) Division of Investment Management announced that it has updated its frequently asked questions (“FAQs”) on Form ADV and the Investment Adviser Registration Depository (“IARD”). The updated FAQs include, among other things, additional information regarding specific questions on Form ADV, many of which were amended by final rulesapproved by the SEC on August 25, 2016. The FAQ document also includes a summary of changes adopted to Form ADV Part 1A that will be implemented on October 1, 2017.     

Speeches and Statements

Bricker Emphasizes Role of Academic Research in SEC’s Mission

In remarks before the 2017 Journal of Accounting and Public Policy Conference on June 9th, SEC Chief Accountant Wesley R. Bricker discussed how academic research and economic analysis inform the rulemaking and oversight activities of the SEC. Bricker identified several areas of interest for future academic research relevant to the SEC’s mission, including financial accounting; governance and controls; auditing; investment decision-making; and the reporting of other information, such as non-GAAP measures and non-financial metrics.       

Other Developments

Staff Announcements

The SEC announced on June 15th that Keith E. Cassidy will serve as Associate Director, Technology Controls Program, in the agency’s Office of Compliance Inspections and Examinations (“OCIE”).

SEC Announces Investor Advisory Committee Meeting Agenda

On June 14th, the SEC released the agenda for the upcoming meeting of its Investor Advisory Committee, which will take place on June 22, 2017. Among other things, the Committee will discuss capital formation for smaller companies, the declining number of initial public offerings, and an overview of certain provisions of the Financial CHOICE Act of 2017 relating to the SEC.  SEC Press Release.

Commodity Futures Trading Commission

Giancarlo Appoints New OPA Director

On June 13th, CFTC Acting Chairman J. Christopher Giancarlo announced the appointment of Erica Elliott Richardson as Director of the Office of Public Affairs (“OPA”), effective immediately. Giancarlo also announced the departure of Steven W. Adamske, who served as OPA Director during a time when the agency put in place oversight of the $300 trillion-plus swaps market, protected commercial end-users, enhanced customer protections, originated a customer outreach program, and uncovered attempts to manipulate major financial benchmarks around the world. Adamske will continue to serve the agency as a policy advisor to Commissioner Sharon Y. Bowen.     

MRAC Announces Agenda for Upcoming Public Meeting

The CFTC’s Market Risk Advisory Committee (“MRAC”) announced the agenda for its June 20th public meeting, which will be held at the agency’s Washington, D.C., headquarters. The MRAC will respond to a presentation by the Division of Clearing and Risk on how it conducts risk surveillance of central counterparties (“CCPs”); discuss how to better inform the CCP regulatory framework through academic research and economic analysis; and advise the agency of the potential effects of Brexit on financial markets.

Federal Rules Effective Dates

June 2017 – August 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

CBOE Withdraws Proposed Changes to Complex Order Rules

On June 14th, the SEC provided notice that the Chicago Board Options Exchange Incorporated (“CBOE”) has withdrawn its proposal to amend its rules with respect to complex orders by simplifying the definitions of the complex order types that may be made available on a class-by-class basis; setting forth applicable ratios for a complex order in open outcry to be eligible for complex order priority within applicable priority rules; and clarifying the applicable minimum increment for complex orders in open outcry. SEC Release No. 34-80926.   

Financial Industry Regulatory Authority

FINRA Announces Innovation Outreach Initiative and Blockchain Symposium

On June 13th, the Financial Industry Regulatory Authority (“FINRA”) announced the launch of an Innovation Outreach Initiative to assist FINRA in better understanding financial technology innovations and their impact on the securities industry. To support the launch of the initiative, FINRA will host a Blockchain Symposium on July 13, 2017, in which regulators and industry leaders will discuss the use of blockchain and related opportunities and challenges. 

FINRA Prepares Firms for Use of New TRACE for Treasuries Modifiers

FINRA published a Trade Reporting Notice on June 12th that advises member firms of the effective date for use of two new modifiers, when applicable, to be reported on transactions in Treasuries: “B” on a trade report if the transaction is part of a series of transactions where at least one of the transactions involves a futures contract, and “S” on a trade report if the transaction being reported is part of a series of transactions and may not be priced based on the current market. Although the modifiers will be available for use when reporting begins on July 10, 2017, they will not be required until February 5, 2018.     

ICE Clear Corp.

ICC Withdraws Proposal to Revise Its Liquidity Risk Management and Stress Testing Frameworks

On June 9th, the SEC announced that ICE Clear Credit LLC (“ICC”) withdrew its proposed rule change to revise the ICC Liquidity Risk Management Framework and the ICC Stress Testing Framework. SEC Release No. 34-80900.

ICC Proposes to Modify Bid-Offer Width Scaling Methodology

On June 9th, the SEC requested comments on a proposed rule change filed by ICC that would revise the ICC End-of-Day Price Discovery Policies and Procedures related to the market variability bid-offer width (“BOW”) scaling methodology by introducing an automated assessment of market variability and, if appropriate, an automatic widening of BOWs. Comments should be submitted on or before July 6, 2017. SEC Release No. 34-80895.     

Miami International Securities Exchange LLC

SEC Approves Changes to MIAX Options’ PRIME Exposure Periods

On June 15th, the SEC issued an order approving the Miami International Securities Exchange LLC’s (“MIAX Options”) proposal to amend its rules to modify the exposure periods of MIAX Options’ Price Improvement Mechanism (“PRIME”) and PRIME Solicitation Mechanism from 500 milliseconds to a time period designated by MIAX Options of no less than 100 milliseconds and no more than 1 second. SEC Release NO. 34-80940.     

Municipal Securities Rulemaking Board

MSRB Proposes to Modernize Rules on Customer Account Transfers

On June 7th, the SEC requested comments on a proposed rule change filed by the Municipal Securities Rulemaking Board (“MSRB”) that would amend MSRB Rule G-26, on customer account transfers, to modernize the rule and promote a uniform customer account transfer standard for all brokers, dealers, municipal securities brokers and municipal securities dealers. Comments should be submitted on or before July 5, 2017. SEC Release No. 34-80890.     


MRX Proposes Changes to Opening Process

On June 15th, the SEC requested comments on a proposed rule change filed by Nasdaq MRX LLC (“MRX”) that would amend its opening process in connection with a technology migration to a Nasdaq Inc. (“Nasdaq”) supported architecture. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of June 19, 2017. SEC Release No. 34-80937.

SEC Delays Action on ISE’s Proposed Corporate Governance Changes

On June 14th, the SEC designated July 31, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning a proposal filed by Nasdaq ISE LLC (“ISE”) to harmonize its board and committee structure, and all related corporate governance processes, with that of the three other registered national securities exchanges and self-regulatory organizations owned by the ISE’s indirect parent company, Nasdaq. SEC Release No. 34-80923.     

National Securities Clearing Corporation

NSCC Proposes New Stock Options and Futures Settlement Agreement with OCC

On June 15th, the SEC requested comments on a proposed rule change filed by the National Securities Clearing Corporation (“NSCC”) that would permit NSCC to adopt a new agreement with The Options Clearing Corporation (“OCC”) to provide for the settlement of certain stock options and delivery obligations arising from certain matured physically-settled stock futures contracts cleared by OCC. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of June 19, 2017. SEC Release No. 34-80942.     


NYSE Proposes to Amend Rules for Companies Without Prior Exchange Act Registration That List Without a Concurrent IPO

On June 15th, the SEC provided notice of a proposed rule change filed by the New York Stock Exchange LLC (“NYSE”) that would modify the provisions in its listed company manual relating to the qualification of companies listing without a prior Exchange Act registration so that they apply to companies listing upon effectiveness of an Exchange Act registration statement without a concurrent Securities Act registration. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of June 19, 2017. SEC Release No. 34-80933.     

Options Clearing Corporation

OCC Proposes New Stock Options and Futures Settlement Agreement with NSCC

On June 15th, the SEC requested comments on a proposed rule change filed by OCC that would permit it to adopt a new Stock Options and Futures Settlement Agreement with NSCC to provide for the settlement of certain stock options and delivery obligations arising from certain matured physically-settled stock futures contracts cleared by OCC. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of June 19, 2017. SEC Release No. 34-80941.

Judicial Developments

Firm and Underwriter Complied with Their Payment Obligations Pursuant to Settlement with Bondholders

An appeal arose out of a securities class action involving defendants’ alleged violations of the Missouri Securities Act relating to a failed bond issue by the City of Moberly, Missouri. Plaintiff bondholders appealed the district court’s denial of their motion to enforce a settlement agreement. Defendants contended that the distribution of settlement checks to the class moots plaintiffs’ appeal and resolves the case. The Eighth Circuit affirmed on June 12th, concluding that the district court correctly held that defendants’ payment to the class complied with the unambiguous language of the stipulation. Cromeans v. Morgan Keegan & Company.

Industry News

FINRA Declines to Name Firms That Pose the Highest Risk to Investors

On June 12th, Reuters Investigates published a special report on FINRA. According to the investigation, although FINRA knows which firms tend to employ advisers with histories of misconduct sanctions, legal disputes, and financial distress, Wall Street’s self-regulator keeps that data secret, claiming it cannot prevent age-old hiring practices it concedes are a threat to investors.