U.S. Financial Industry Developments

FINRA Requests Comment on Financial Technology Innovation in the Broker-Dealer Industry

On July 30, 2018, the Financial Industry Regulatory Authority ("FINRA") published a Special Notice, in response to requests from the public, "seeking comments on how FINRA can support fintech development consistent with [its] mission." In addition, FINRA requested "specific comment on certain fintech areas, including the provision of data aggregation services, supervisory processes concerning the use of artificial intelligence, and the development of a taxonomy-based machine-readable rulebook."

The Special Notice recites a number of the steps FINRA has already taken to improve its understanding of how fintech is "transforming the securities industry and to provide information to investors and [its] members about these developments." Among other things, the Special Notice references FINRA's report: "Distributed Ledger Technology: Implications of Blockchain for the Securities Industry" (the "Report"). 

The Report surveys some of the operations and regulatory considerations for broker-dealers seeking to be involved in the digital asset space. The Report leaves no doubt that broker-dealers that wish to organize and operate a platform for transactions in crypto-currency securities face many challenges that must be addressed with FINRA.

The Comment Period Expires on October 12, 2018.

Federal Regulators Issue Key Guidance on Fintech Issues

On July 30, 2018, the U.S. Department of the Treasury ("Treasury") and the Office of the Comptroller of the Currency ("OCC") provided important guidance on a broad range of issues confronting the fintech industry. Treasury released a long-awaited report titled A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation (the "Treasury Report").

Following a specific recommendation in the Treasury Report, the OCC formally announced that it would begin to accept applications for special purpose national bank charters, and it provided guidance on the procedures and standards that would govern such applications through the issuance of a Licensing Manual Supplement for Special Purpose National Banks (the "Manual Supplement"). Taken together, the Treasury Report and the OCC announcement reinforce the commitment of the federal government to promote the growth of the fintech industry. Click here to read the full Orrick-authored alert.

SEC Order Sets Aside Action by Delegated Authority and Disapproves a Proposed Rule Change by the Bats BZX Exchange, Inc., as Modified by Amendments No. 1 and 2, to List and Trade Shares of the Winklevoss Bitcoin Trust

On July 26, 2018, the Securities and Exchange Commission ("SEC"), over the objection of Commissioner Peirce, disapproved a proposed rule change application by the Bats BZX Exchange, Inc. ("BZX") that would have permitted it to list and trade shares of the Winklevoss Bitcoin Trust. This Order, effectively, reaffirmed and superseded the action taken by the SEC on March 10, 2017, acting through authority delegated to the Division of Trading and Markets, that denied a similar application. In issuing its July 26 Order, the SEC determined that BZX had "not met its burden under the [Securities Exchange of 1934] and the Commission's Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices."

Update: Newly Passed Delaware Law Will Necessitate Important Updates to Credit Agreements

On July 23, 2018, the State of Delaware amended the Delaware Limited Liability Company Act to allow a Delaware limited liability company to divide itself into two or more LLCs (effective as of August 1, 2018). The original LLC will have the ability to allocate its assets, liabilities, rights and duties among the newly divided LLCs pursuant to a "plan of division" and then terminate or continue its own existence. Following the division, each LLC would own the assets and be obligated on the liabilities of the original LLC only to the extent they are allocated to it by the plan of division (unless the plan of division constitutes a fraudulent transfer). The amendment provides that if an LLC formed prior to August 1, 2018 is a party to any agreement entered into prior to that date containing a restriction on mergers, consolidations or transfers of assets by such LLC, then such restriction will be deemed also to apply to any division by such LLC. Click here to read the full Orrick-authored alert.

European Financial Industry Developments

EC Seeks Guidance on Sustainable Finance

The European Commission ("EC") published an open letter to EIOPA and ESMA on August 1, 2018. The letter sought technical advice in relation to sustainable finance, in particular technical advice relating to legislation.

The letter, the full version of which is available here, outlines that the European Commission adopted a package of measures on sustainable finance on May 24, 2018, however they are seeking advice in relation to the possible amendment of legislation such as UCITS, MiFID II and Solvency II.

The aim of the letter, and the possible changes proposed therein, is to incorporate sustainability risks in the decisions taken and processes applied by financial market participants.

The letter asks that EIOPA and ESMA provide their insight by April 30, 2019.

OTC Derivative Brexit Issues Considered by AFME and ISDA

A paper was jointly published by AFME and ISDA on July 30, 2018 which considered the potential contractual continuity issues which may influence OTC derivative contracts following Brexit.

As has been widely discussed, Brexit will bring an end to the single market passport. The passport currently allows regulated activities to be carried out by the UK in EU countries without additional local licenses. This however will no longer be in place following Brexit. Given that a number of contracts will have been entered into prior to Brexit and will continue thereafter, there is a risk that entities may be carrying out regulated activities in other jurisdictions without having the relevant local licensing requirements in place following Brexit.

The report, the full version of which is available here, looks at possible solutions both for UK entities, as well as regulators, in order to minimize disruption following Brexit.

FCA Releases Statement on Speculative Investments

Following the publication of product intervention measures by ESMA in relation to contracts for difference ("CFDs") earlier this year, the Financial Conduct Authority ("FCA") has provided a statement in relation to high risk investments and retail clients.

The FCA noted in its statement that it would work with European regulators (including ESMA) to observe the alternative speculative product market, in particular where retail clients are involved, in order to ensure ESMA's measures are not being avoided by replacing CFDs with other similar products.

The FCA stated that firms "should pay particular attention to the leverage made available to retail clients and consider whether the product is offered on terms that act in the best interests of the client".

The full statement is available here.