Financial Industry Developments

CFPB Issues FInal Arbitration Rule - Who Is Covered and How Does It Affect Your Business? 

The CFPB, after entertaining numerous comments, issued its final arbitration rule on Monday, July 10, 2017. The rule prohibits specified providers of certain consumer financial products and services (loans, credit cards, and other products and services) from using an agreement with a consumer that provides for mandatory arbitration of disputes in lieu of filing or participating in a class action. (CFPB regulations already prohibit using pre-dispute agreements in most types of consumer mortgages.)

To read Orrick's full alert, please click here.

Federal Regulatory Agencies Announce Coordination of Reviews for Certain Foreign Funds Under Volcker Rule 

On July 21, 2017, the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission announced that they are coordinating their respective reviews of the treatment of certain foreign funds ("Foreign Excluded Funds") under section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, and the agencies' implementing regulations.  Section 619 generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a covered fund. These prohibitions are subject to a number of statutory exemptions, restrictions, and definitions.

Foreign Excluded Funds are investment funds organized and offered outside of the United States that are excluded from the definition of "covered fund" under the agencies' implementing regulations.  Section 619, and the implementing regulations, generally do not apply to investments in, or sponsorship of, Foreign Excluded Funds by a foreign banking entity.

However, complexities in the statute and the implementing regulations may result in certain Foreign Excluded Funds becoming subject to regulation under section 619 because of governance arrangements with or investments by a foreign bank. As a result, a number of foreign banking entities, foreign government officials, and other market participants have expressed concern about possible unintended consequences and extraterritorial impact.

The staff of the agencies announced that they are considering ways in which the implementing regulations may be amended, or other appropriate action may be taken.  They noted that it may also be the case that congressional action is necessary to fully address the issue. To aid full consideration, the federal banking regulators announced that they would not take action under section 619 for qualifying Foreign Excluded Funds, subject to certain conditions, for a period of one year.

SEC Approves FiNRA Rule Change Affecting Representative Registration Rule and Qualification Exam Program

On July 7, 2017, the SEC issued an Order approving a Financial Industry Regulatory, Inc. ("FiNRA") comprehensive proposed Rule change (the "Proposal") to adopt consolidated Representative registration rules, restructure the Representative-Level Qualification Examination Program, allow permissive registration, establish an exam waiver process for persons working for a financial services affiliate of a Member, and amend the Continuing Education Requirements.  The Proposal had been filed with the SEC on March 28, 2017 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder.

The Proposal addressed a number of longstanding issues, include the current representative-level qualification examinations.  Representative-level registrants will now be required to take a general knowledge exam (the "SIE") and a specialized knowledge exam appropriate to their job functions at the firm with which they are associating.  Also, the Proposal addressed the issue of waivers of examination requirements for individuals working for a financial services affiliate of a member.  FINRA stated that the Proposal will provide a process whereby individuals who would be working for a financial services industry affiliate of a member would terminate their registrations with the member and would be granted a waiver of their requalification requirements upon re-registering with a member, provided the firm that is requesting the waiver and the individual satisfy the criteria for the waiver as set forth in the rule, including that:  (i) before the individual's initial designation, the individual was registered as a representative or principal with FINRA for a total of five years within the most recent 10-year period, including for the most recent year with the member that initially designated the individual; and (ii) the waiver request is made within seven years of the individual's initial designation.

European Financial Industry Developments

ESMA Updates Technical Reporting Instructions on Transaction Reporting Under the MiFIR

On July 20, 2017, ESMA published an updated version of its technical reporting instructions dated July 17, 2017 relating to transaction reporting under MiFIR.

The introduction of MiFIR extends the transaction reporting requirements regarding the scope of instruments in which transactions should be reported, as well as the extent of the information that should be provided for each transaction. MiFIR intends to be a maximum hamonizing legislative act, therefore all member states should follow the rules prescribed, without the right to exercise any national discretion as regards their implementation.

In March 2015, the ESMA Board of Supervisors decided that a common specification for transaction reporting between competent authorities and reporting entities should be developed by ESMA. The reporting instructions cover the elements of the interface that should be built between competent authorities and market participants in their member states. In particular, the reporting instructions provide information on:

• The overall process for transaction data reporting.
• The common technical format for data submission.
• The common set of data quality controls to be applied to each transaction report.

Operational and technical arrangements not covered in the reporting instructions shall be defined and implemented by competent authorities at their discretion.

ESMA published the original version of the reporting instructions in October 2016.

Council of EU Non-Objection to Delegated Regulations Relating to Solvency II, MiFIR And EMIR

On July 19, 2017, the Council of the EU published the minutes of the meeting held in its configuration as the Agriculture and Fisheries Council on July 17 and 18, 2017.

Among other things, at the meeting, the Council decided not to object to the following European Commission Delegated Regulations:

• Delegated Regulation amending the Solvency II Delegated Regulation ((EU) 2015/35) concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings, adopted in June 2017.
• Delegated Regulation supplementing the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) regarding the exemption of certain third country central banks from pre- and post-trade transparency requirements, adopted in April 2017.
• Delegated Regulation amending Commission Delegated Regulation ((EU) 151/2013) supplementing EMIR (Regulation 648/2012), adopted in June 2017 and applying from November 1, 2017.

The Delegated Regulations can now enter into force unless the European Parliament objects.

European Commission Adopts Delegated Regulation on RTS on Co-Operation and Exchange of Information for Passporting under the Revised PSD2

On June 26, 2017, the European Commission published the text of a Delegated Regulation supplementing PSD2 with regard to RTS for the co-operation and exchange of information between competent authorities relating to the exercise of the right of establishment and the freedom to provide services of payment institutions.

The Delegated Regulation:

• Specifies the framework for co-operation and exchange of information between competent authorities for passporting under Article 28(5) of the PSD2.
• Stipulates, in particular, the information that national supervisors will have to exchange with one another and, in doing so, distinguishes the notifications related to branch establishments, engagement of agents or distributors, and free provision of services.
• Defines the specific features of these notifications regarding format, transmission channel and language.

The Commission adopted the Delegated Regulation on June 23, 2017.

The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation.