U.S. Financial Industry Developments

SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships with Investment Professionals

On April 18, the Securities and Exchange Commission voted to propose a package of rulemakings and interpretations consisting of more than 900 pages that are "designed to enhance the quality and transparency of investors' relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products."

As stated in the Commission's Press Release announcing this action: "Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.  Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations."

The Commission also proposed an interpretation to reaffirm and, in some cases, clarify its views of the fiduciary duty that investment advisers owe to their clients.

In addition, the Commission proposed to help address "investor confusion" regarding the nature of their relationships with investment professionals through a new short-form disclosure document dubbed "a customer or client relationship summary" (a "CRS"). The Commission stated that it believes that Form CRS would provide retail investors with "simple, easy-to-understand information" about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.

Finally, the Commission proposed to restrict certain broker-dealers and their financial professionals from using the terms "adviser" or "advisor" as part of their name or title with retail investors.

In proposing these new regulations the Commission added that: "Taken as a whole, the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers: provide clear disclosures, exercise due care, and address conflicts of interest. The specific obligations of investment advisers and broker-dealers would be, however, tailored to the differences in the types of advice relationships that they offer.

The public comment period will remain open for 90 days following publication of the documents in the Federal Register.

Proposed Rules: Regulation Best Interest. Form CRS Relationship Summary.

Proposed Interpretation: Standard Conduct for Investment Advisers.

Agencies Propose Transition of New CECL Accounting Standard into Regulatory Capital Framework

On April 17, 2018, the federal banking agencies proposed a revision to their regulatory capital rules to address and provide an option to phase in the regulatory capital effects of the new accounting standard for credit losses, known as the "Current Expected Credit Losses" ("CECL") methodology. The proposal addresses the regulatory capital treatment of credit loss allowances under the CECL methodology and would allow banking organizations to phase in the day-one regulatory capital effects of CECL adoption over three years. The proposal would revise the agencies' regulatory capital rules and other rules to take into consideration differences between the new accounting standard and existing U.S. generally accepted accounting principles. Comments on this proposal will be accepted for 60 days after publication in the Federal Register. Press Release. Proposed Rule.

SEC Unveils Public Service Announcement to Promote Background Checks on Investor.gov

On April 16, the Securities and Exchange Commission ("SEC") unveiled a public service announcement ("PSA") to encourage investors to check the background of their investment professional by using the free search tool on Investor.gov before investing. Chairman Clayton stated that: 

"Investor education is an important line of defense against fraud and is critical to our efforts to both protect Main Street investors and improve their financial decision making. Through public service announcements, investor alerts and bulletins, and direct outreach, the SEC will continue to focus on empowering investors." Press Release.

Regulatory Risks Facing Cryptocurrency Trading Platforms

What does it mean for a cryptocurrency trading platform to be compliant with U.S. laws? The answer is not as clear as some may expect and hinges on such questions as how tokens on the platform are legally categorized and how trading is conducted. Orrick’s Jason Somensatto, Of Counsel to our White Collar, Investigations, Securities Law and Compliance Practice, recently explored this issue in Bloomberg Law’s Securities and Regulation Report™.

What is clear from recent developments is that multiple U.S. regulators are scrutinizing whether trading platforms are complying with various regulatory schemes. Most notably, token trading platforms risk enforcement for not following law applicable to money transmission and to securities and commodities trading. Although enforcement against cryptocurrency businesses in these areas has thus far been minimal, trading platforms should expect that to change in light of the increasing attention being paid by regulators to these issues.

To view the full article, please visit Bloomberg's website or alternatively find the PDF on our website.

European Financial Industry Developments

Draft Text of European Parliament Legislative Decision on the MLD5

The European Parliament published the provisional edition of the Fifth Money Laundering Directive ("MLD5") on April 19, 2018 which it decided to adopt in full on the same day.

The Parliament has asked the European Commission to inform it if it replaces or substantially amends the proposal. It has also instructed the President to inform its position to the Council of the EU, the Commission and National Parliaments.

The next step is for the Council to formally adopt the proposed MLD5. When this happens it will enter into force 20 days after being published in the Office Journal of the EU ("OJ"). The draft text currently sets out that member states must enshrine the provisions of MLD5 into their national law 10 months after the date on which it enters into force.

ECON Drafts a Report on Proposed IFR

The Economic and Monetary Affairs Committee ("ECON") drafted a report dated April 11, 2018 on the proposal for a regulation on the supervision on investment firms. A link to the report is here.

In December 2017, the European Commission published proposals for the Investment Firms Regulation ("IFR") and for a directive on the prudential requirements of investments firms, known as the Investment Firms Directive ("IFD").

Draft Report Published by ECON-AFCO on Decision to Increase Regulatory Power for ECB Over Clearing Systems

The European Parliament's Economic and Monetary Affairs Committee ("ECON") and Committee on Constitutional Affairs ("AFCO") have published a joint draft report on a decision to amend article 22 of the Statute of the European System of Central Banks and of the European Central Bank ("ECB").

The decision relates to an ECB recommendation for a decision made in June 2017, where it sought a greater role in the regulation of clearing systems for financial instruments, including central counterparties ("CCPs") by amending article 22 of the statute. This amendment would allow the Eurosystem (i.e. the ECB and the national central banks of Eurozone nations) to assess risks posed by CCPs clearing significant amounts of transactions made in Euros and also to enable the ECB to adopt additional requirements for those CCPs.

Two reporters, Gabriel Mato and Danuta Maria Hübner welcomed the ECB's proposal. In particular, they highlighted:

• As the ECB's new powers will interact with those of other EU institutions, nations will be more inclined to respect the laws of other EU institutions by the acts adopted by the ECB under the amended article 22 of the statute.
• The recitals of the amending decision should contain regulatory powers that can be used over CCPs by the ECB under article 22 of the statute, including allowing monetary concerns to be addressed.