US Regulatory Update
Supreme Court Limits Dodd-Frank Protections for Whistleblowers
On 21 February, the Supreme Court ruled unanimously in Digital Realty Trust, Inc. v. Somers that anti-retaliation provisions of Dodd-Frank apply only where a whistleblower has reported an alleged fraud to the SEC. The Court’s opinion noted that the purpose of the whistleblower program is to “motivat[e] people who know of securities law violations to tell the SEC”; hence, individuals – such as the respondent in the case, Paul Somers – who report alleged securities violations internally within the company but fail to report such violations to the SEC will not be protected by the whistleblower provisions of Dodd-Frank. Notably, the Court stated that it did not “accord deference to the contrary view advanced by the SEC in Rule 21F-2”; the rule does not require SEC reporting for purposes of the anti-retaliation protections. The Court held that “the statute’s unambiguous whistleblower definition, in short, precludes the Commission from more expansively interpreting that term.”
SIFI AND FINANCIAL STABILITY
Financial Stability Oversight Council Holds Executive Session
On 21 February, Treasury Secretary Steven Mnuchin convened an executive session of the Financial Stability Oversight Council (“FSOC”). According to the meeting readout, the Council discussed: (i) “a potential process for considering applications from bank holding companies or their successors under section 117” of Dodd-Frank; (ii) the ongoing annual re-evaluation of the Council’s designation of a nonbank financial company; and (iii) recent volatility in financial markets and the impact of this volatility. The Council also approved the minutes of its previous meeting on 14 December 2017, which covered: (i) the “report issued by the Secretary of the Treasury on November 17, 2017, regarding the Council’s processes for designating nonbank financial companies and financial market utilities”; (ii) the pending litigation brought by MetLife challenging its designation as a systemically important financial institution (“SIFI”); and (iii) a presentation from CFTC Chairman J. Christopher Giancarlo on the newly-introduced Bitcoin futures contract.
Treasury Recommends Keeping Dodd-Frank Liquidation Power
On 21 February, the Department of the Treasury released a report on the orderly liquidation authority (“OLA”) and bankruptcy reform, which, among other things, called for the correction of “serious defects” related to the OLA process but stopped short of calling for its repeal. As explained in the press release, Treasury’s report “recommends making significant reforms to the OLA process to eliminate opportunities for ad hoc disparate treatment of similarly situated creditors, reinforce existing taxpayer protections, and strengthen judicial review.” It also recommends the creation of a “new Chapter 14 of the Bankruptcy Code for distressed financial companies . . . which would make the likelihood of having to use OLA even more remote.” The report also endorses “retaining OLA as an emergency tool for use under extraordinary circumstances.”
SEC & CYBERSECURITY
SEC Adopts Statement and Interpretive Guidance on Public Company Cybersecurity Disclosures
On 20 February, the SEC voted unanimously to approve interpretive guidance and a statement aimed at assisting public companies with the preparation of disclosures regarding cybersecurity incidents and risks.
o The interpretive guidance expanded upon previous cybersecurity disclosure guidance provided in 2011 by the SEC’s Division of Corporation Finance, which outlined the requirements for companies to disclose cybersecurity-related issues and instructed companies to consider the materiality of cybersecurity risks and incidents when preparing disclosures. Specifically, the new interpretive guidance addressed two additional cybersecurity-related issues: (i) “the importance of cybersecurity policies and procedures”; and (ii) “the application of insider trading prohibitions in the context of cybersecurity.”
o In the statement, Chairman Clayton “urge[d] public companies to examine their controls and procedures, with not only their securities law disclosure obligations in mind, but also reputational considerations around sales of securities by executives” and stated that the SEC will continue to “evaluate developments in this area and consider feedback about whether any further guidance or rules are needed.”
CFTC: SWAPS CLEARING & FINTECH
CFTC Staff Extends No-Action Relief for Submission of Swaps for Clearing with DCOs Operating Under CFTC Exemptive Orders or No-Action Relief
On 20 February, the CFTC’s Division of Market Oversight announced the extension of its time-limited no-action relief to entities submitting swaps for clearing by derivatives clearing organizations (“DCOs”) operating under CFTC exemptive orders or no-action relief provided by the CFTC. The letter provided time-limited no-action relief in two areas:
o Entities not acting as a DCO or central counterparty, but which are a counterparty (“Relief DCO Counterparty”) to a swap cleared by a DCO operating under an exemptive order or no-action relief (“Relief DCOs”), will be relieved from certain reporting obligations. Relief from these obligations “will continue until the earlier of (a) February 19, 2021; (b) the effective date of any CFTC regulation that alters relevant swap reporting obligations; or (c) “the revocation or expiration of the exemptive order or no-action letter issued to the relevant Relief DCO.”
o The Division will not recommend enforcement action against entities reporting a swap intended to be cleared by a Relief DCO as a cleared swap in certain primary economic terms (“PET”) data fields for that swap. It also notes that this relief “will expire on the earlier of (a) February 19, 2021; (b) the effective date of any CFTC regulation altering or amending the ‘Clearing indicator’ or ‘Clearing venue’ PET data fields in Part 45 of the CFTC’s regulations, or the ‘Cleared or Uncleared’ data field in Part 43 of the CFTC’s regulations; or (c) the revocation or expiration of the exemptive order or no-action letter issued to the relevant Relief DCO.”
US CFTC and UK FCA Sign Arrangement to Collaborate on FinTech Innovation
On 20 February, the CFTC announced that it had signed an arrangement with the UK’s Financial Conduct Authority (“FCA”) committing the regulators to collaborate and support firms through each of the regulators’ FinTech initiatives, namely LabCFTC and FCA Innovate. According to the press release, which includes statements from CFTC Chairman Christopher J. Giancarlo and FCA Chief Executive Andrew Bailey, the arrangement focuses on information sharing and facilitates “responsible FinTech innovation and . . . international collaboration on emerging regulatory best practices.”
UPCOMING EVENTS AND DEADLINES
o 8 March: SEC Investor Advisory Committee meeting.
o 11 March: comments are due on the SEC’s request for comments on the use and necessity of the information collected by Form PF.
o 15 March: comments are due on the Federal Reserve Board’s proposed guidance clarifying its supervisory expectations related to risk management for large financial institutions.