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Overview – Securities Regulation
Chambers USA 2018

Re-evaluation of Legal and Regulatory Requirements

The securities regulatory environment continues to evolve. The SEC, under new Chairman Jay Clayton, has announced a more focused regulatory agenda prioritizing the needs of retail investors. Both houses of Congress have passed limited changes to the Dodd-Frank Act, but they have not yet agreed on a unified approach and it is not clear whether new legislation will ultimately pass. Until passage of new legislation, the Dodd-Frank Act remains in effect, including its requirement to finalize some rules not yet adopted. The SEC and the federal banking regulators are reviewing potential revisions to some Dodd-Frank Act initiatives such as the Volcker Rule, as well as next steps after the partial judicial invalidation of the risk-retention rules. In the meantime, the European Union (EU) has implemented the MiFID II directive, which has had significant effects on both broker-dealers and investment managers active in both the US and the EU. The EU is in the process of implementing the General Data Protection Regulation (GDPR) which also affects firms active in multiple jurisdictions. The SEC, CFTC and EU continue to attempt to harmonize the regulation of swaps and derivatives. The EU regulatory picture is complicated in the UK by the still uncertain effects of Brexit.

Within the US, the SEC is considering a uniform best-interests-of-the-customer standard of care for both broker-dealers and investment advisers. This standard would likely supplant the Department of Labor’s fiduciary standard for retirement accounts, which was recently struck down by the Fifth Circuit Court of Appeals. The SEC is exploring ways of making the securities offering process more streamlined and efficient, and making disclosure requirements more relevant for both public companies and mutual funds. The SEC is reviewing market structure issues in both the equities and fixed income markets. The SEC has announced a two-year pilot to change exchange access fees and rebates for equity securities. The SEC expects to adopt a revision to Regulation NMS to expand execution quality disclosure, and to expand the disclosures required from alternative trading systems. The SEC may reconsider the regulatory authority of for-profit exchanges and the current securities market data regime. At the same time, the SEC, FINRA and MSRB have imposed new best execution and pre-trade and post-trade transparency initiatives in the fixed income markets. Meanwhile, the investment management industry must implement new requirements for liquidity risk management and the SEC is considering how to streamline the responsibilities of mutual fund board directors. The SEC and CFTC are both considering how to regulate developments in the block-chain and crypto-currency area. Both agencies are considering financial technology innovations more generally, such as automated investment advice, while also monitoring cyber-security risks and algorithmic trading. FINRA is conducting what it calls a 360 degree review of its rules, focusing on issues such as communications with the public, outside business activities, the membership application process, gifts and entertainment, and the corporate financing rules.


New leadership at the SEC, CFTC and FINRA has provided a new opportunity to review enforcement priorities. The SEC has renewed its focus on issues effecting Main Street investors, such as an initiative to encourage self-reporting by investment advisers who may not have bought the least expensive available share class of mutual funds for their clients. The SEC and CFTC have both created large and active task forces investigating potential fraud, manipulation and unregistered activity in the crypto-currency area. The enforcement staff continue to use new tools implemented after the Dodd-Frank Act, such as whistleblower awards, increased authority to use administrative law judges and enhanced sanctions against senior executives. The regulatory agencies also are using enhanced “big data” capabilities to look for connections across traders, markets and countries, while demanding ever more information from firms under investigation. The SEC and FINRA are both focused on anti-money-laundering efforts and suspicious activity reporting, with a new requirement to verify beneficial ownership in corporate entities taking effect in 2018. SEC and CFTC rules on market access and anti-disruptive trading have created new potential enforcement liabilities. Both agencies are actively investigating potential market manipulation activity such as spoofing, layering and cross-market trading strategies. The SEC has refocused resources to increase the number of investment advisers it can inspect in any given year. All of the agencies, including the FTC and CFPB, are focused on cyber-security breaches and responses. The SEC and CFTC have established strong staff-level relationships with the US Department of Justice to encourage criminal prosecution of egregious violations. State securities regulators, attorneys general and banking agencies eagerly pursue their own enforcement agendas, sometimes with little cross-agency coordination, and may step in where they perceive federal-level enforcement to be slackening. At the same time, all of the regulators continue to investigate traditional enforcement priorities such as insider trading, Ponzi schemes, sales practice violations and fraud on senior investors.