February 9, 2023
The financial regulatory news never ends, and this week is no exception, as we look at an important speech on financial inclusion, the CFTC's regulatory agenda, the recent SEC conflict of interest rule announcement and UK developments.
But it’s hard to think “business as usual” as we follow the tragic events in Turkey and Syria − a rising death toll, a growing humanitarian crisis and social and economic devastation everywhere following the powerful earthquakes from earlier this week.
As we all know, there are many international aid organizations that have mobilized to provide support. Many news organizations, including USA Today and Yahoo!, have compiled lists of vetted aid organizations. While it’s not going to change the tragic circumstances, we do send thoughts and prayers, as well as a big thank-you to everyone on the ground trying to make a difference.
Daniel Meade
Editor, Cabinet News and Views
Federal Reserve Board (“FRB”) Vice Chair of Supervision Michael Barr gave remarks to the Banking on Financial Inclusion Conference at Jackson State University early this week.
Vice Chair Barr spoke of the progress that has been made with regard to financial inclusion but pointed out that there continues to be a long way to go to include all households. He noted: “[w]e all have an interest in promoting a vibrant economy as well as resilient families and communities … [where everyone] would have access to credit on fair and equal terms to build a secure financial foundation.” Vice Chair Barr stressed that “despite widespread acceptance of this vision, we have a way to go in making it a reality, particularly for Black households.”
Vice Chair Barr identified three drivers of disparities in economic inclusion and three possible ways to address those disparities.
His three drivers are:
- Discrimination. There continues to be troubling disparities in lending outcomes for Black individuals and businesses relative to others.
- The racial wealth gap. Vice Chair Barr noted that 2019 FRB data shows White families have about eight times the wealth of Black families.
- Disparities in financial services. Vice Chair Barr cited the FDIC’s survey on the unbanked and underbanked (which we discussed last November), which found that the unbanked rate for Black households was 11.3%, compared to 2.1% for White households.
Vice Chair Barr then offered three ways that financial institutions and regulators can work to help address these issues, including:
1. Eradicate discrimination in lending and other financial services, and protect consumers from other unfair, abusive or illegal practices.
2. Seek out opportunities to invest in low- and moderate-income communities.
3. Develop products and services that can help people save and build wealth, noting the development of FedNow faster payment and the Bank On initiative.
In conclusion, Vice Chair Barr said: “[T]hese are complex problems with no easy solutions, but we have an obligation to do our part.” Given this sentiment and how deeply Vice Chair Barr has cared about these issues during his career in government and academia, it is likely that opportunities to “do our part” will be inherent in much of the FRB’s regulatory agenda going forward.
Much like taxes and mortality, it is certain that during 2023 the U.S. Commodity Futures Trading Commission (“CFTC”) will promulgate new rules, issue interpretation and guidance, issue no-action letters, engage in investigations and pursue enforcement cases to police its markets and participants. The direction, however, does change from year to year and depending on the Administration. It is likely that the CFTC will pursue the following agenda based on CFTC commissioners’ public statements and based on the rule list filed by the CFTC in the Fall of 2022 with the U.S. General Services Administration (the Unified Agenda of Federal Regulatory and Deregulatory Actions).
Trading Facilities
One of the key traditional priorities for the CFTC is regulation of trading facilities, such as commodity exchanges (designated contract markets – “DCMs”) and swap execution facilities (“SEFs”). In response to a dramatic growth in prediction and event contract markets, the CFTC is likely to promulgate a rulemaking on event contract markets (such as binary options for political events or sports outcomes). Recent enforcement and regulatory actions are indicative of a critical mass of enquiries that will need to be addressed by a federal agency ruling.
Even though rules for SEFs were implemented 10 years ago, the CFTC continues to finetune its regulations, such as revisions to rules on “made available to trade,” conflicts of interest and governance of SEFs, as well as Part 40 regulations applicable to all registered entities. It is likely that the CFTC will address in a rulemaking its no-action positions on § 37.6(b) for confirmation of swaps executed on a SEF and maintaining the swaps documentation, package transactions, and reporting of SEF-executed swaps.
It is also expected that there will be further guidance (including by enforcement) relating to DeFi and decentralized autonomous organization (“DAO”) facilities. There is hope that the CFTC will also provide further guidance relating to its controversial SEF advisory from September 29, 2021.
Swap Dealers and FCMs
Even though swap dealers (“SDs”) have been subject to CFTC regulation and registration for over 10 years now, they are still “provisionally” registered. Now that the CFTC has completed its position limits rules, and specifically with respect to swaps, it is expected that this “provisional” category will go away in 2023. As with SEFs, the CFTC will continue adjusting its rules − e.g., with respect to capital and risk management over SDs.
It is also expected that the National Futures Association (“NFA”) will continue with its enhanced supervisions of SDs and other registered members. The CFTC is also proposing additional rules on system safeguards and testing for CFTC registrants.
Reporting
Even though the CFTC has recently overhauled its reporting rule in Parts 43 and 45, it will continue work on many more detailed aspects of these rules, such as appendices for supplemental reporting fields as well as the large trade reporting under Part 17. The CFTC is also working on reporting and information requirements amendments and rules for DCOs.
Crypto Regulation
The collapse of FTX in the Fall of 2022 has upended Congressional efforts at proposing the regulatory framework for the digital assets industry. The CFTC is making an argument that none of the CFTC-regulated FTX entities (the DCM, the DCO and a SEF) became insolvent and are not a part of the bankruptcy filing. There is a concern, however, that neither the CFTC nor the SEC needed any additional jurisdiction to prevent the fraud that eventually took down both Alameda and FTX.
Nevertheless, the CFTC continues to advocate for an expanded jurisdictional reach over spot and forward commodity markets to have the jurisdiction to regulate and police crypto and other digital assets markets. It is likely that there will be a lot of regulatory activity in 2023 in response to FTX’s collapse.
Carbon and Climate Change
CFTC’s commissioners have noted on several occasions that the CFTC has a role to play in policing and regulating voluntary and even compliance carbon and other environmental commodity markets. In 2022, the CFTC had conducted its first voluntary carbon markets convening and sought comments on the impact of climate change on U.S. financial markets.
Customer Protection
There are a number of regulatory proposals aimed at the strengthening of customer protection rules applicable to futures, options on futures and swaps customer accounts. The CFTC is intending to propose rules on investment of customer funds, cleared swap customer funds, and foreign futures and foreign options accounts (the § 30.7 accounts), as well as a separate rulemaking on separate and segregated accounts of futures commission merchants (“FCMs”).
Clearing
The CFTC is required under the Dodd Frank Act of 2010 to periodically review the markets and determine if additional swap contracts should be designated as required to be cleared. It is likely that the CFTC will review the list of cleared swaps in addition to the currently cleared interest rate swaps (“IRS”) and credit default swaps (“CDS”). The CFTC had started that work in 2022 with the LIBOR transition and will be further addressing governance standards of designated clearing organizations (“DCOs”).
The CFTC has been working on governance requirements for DCOs and will likely complete its amendment revisions in 2023. Following CFTC’s revisions to its Part 190 rules in 2021, the CFTC will address recovery and wind-down plans for systemically important DCOs and other clearing organizations.
It appears at this time that the CFTC chose not to further address several issues in implementation of initial margin requirements for non-cleared swaps (financial end users, margin affiliates, eligible initial margin collateral, etc.), as noted by CFTC Commissioner Summer Mersinger.
Investment Management
There is a large body of no-action letters, advisories and interpretations relating to commodity trading advisers (“CTAs”) and commodity pool operators (“CPOs”). Many of these entities are also dually registered with the Securities and Exchange Commission (“SEC”). The CFTC intends to amend reporting requirements under Form PF for filers and large hedge fund advisers as well as several regulations in its Part 4 for CTAs and CPOs.
Cross-Border Guidance
It is expected that the CFTC will continue work on finalizing its swaps cross-border regulations with respect to reporting as well as arrange, negotiate and execute provisions and other provisions left unaddressed in its 2022 cross-border rule. Further, it likely that the CFTC will address its no-action letters relating to Brexit and mutual recognition of entities located in the UK but transacting with U.S. persons (e.g., exempted SEFs).
Enforcement
The CFTC will continue to vigorously police its markets, and it is likely that, as discussed in connection with CFTC’s jurisdiction over digital assets, enforcement will focus increasingly on fraud and manipulation in commodities traded in interstate commerce even if there is no derivative (such as futures or swaps or options). It is also likely that the CFTC will address greenwashing and fraud in connection with trading environmental commodities, such as carbon.
As in the past, the CFTC will continue policing reporting and recordkeeping violations, compliance with SD business conduct requirements, its new position limits rules, generally fraud and manipulation, FCPA-type of commodity fraud and manipulation, misappropriation of material non-public information (a.k.a. insider trading), acting as unregistered entities (e.g., crypto exchanges or intermediaries), spoofing, wash trading and other trading violations.
Administrative
There are a number of proposals aimed at streamlining CFTC’s operations as well as “cleaning up” its duplicative or incorrect language in the regulations. As part of this effort, the CFTC will clarify the definition of “small entity,” update guidance on ethical standards for CFTC employees and will further implement the Privacy Act of 1974.
On January 25, 2023, the Securities and Exchange Commission issued a release proposing Rule 192 under the Securities Act of 1933, as amended, a rule that is designed to prohibit “material conflicts of interest” in certain securitizations. Proposed Rule 192 is intended to implement Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was codified as Section 27B of the Securities Act. Subject to certain exceptions, Section 27B prohibits certain participants in asset-backed securities securitization transactions from engaging in transactions within a designated time period that would involve or result in any “material conflict of interest.” Section 27B directs the Commission to issue rules implementing this prohibition no later than 270 days after the enactment of Dodd-Frank (i.e., within 270 days of July 21, 2010).
Rule 192 is intended to supersede proposed Rule 127B, which was proposed by the Commission on September 19, 2011, but never adopted. While proposed Rule 127B largely tracked the text of Section 27B, the Re-Proposal asserts that Rule 192 is designed to “provide greater clarity regarding the scope of prohibited and permitted conduct.”
Read our Clients & Friends Memo here.
On January 24, the European Central Bank (ECB) announced the publication of “new experimental and analytical indicators” that are intended to help analyze climate-related risks in the finance sector and monitor green transition. This development follows the ECB’s detailed climate action plan announced in July 2021.
The indicators cover three areas:
- Experimental indicators on sustainable finance. These indicators cover debt instruments issued or held in the EU that are labelled as “green,” “social,” “sustainability” or “sustainability-linked.” The ECB observed that in addition to “boosting transparency, these indicators also help track progress on the transition to a net-zero economy. That said, the lack of internationally accepted and harmonised standards on what defines a green or sustainable bond makes the data less reliable overall.”
- Analytical indicators on carbon emissions financed by financial institutions. These indicators provide information on the carbon intensity of the securities and loan portfolios of financial institutions, and on the financial sector’s exposure to counterparties with carbon-intensive business models.
- Analytical indicators on climate-related physical risks. These indicators cover the impact of natural hazards, such as floods, wildfires or storms, on the performance of loans, bonds and equities portfolios.
In its accompanying press release, the ECB acknowledges that the new indicators are currently a work in progress. Experimental data does not yet correspond to the quality requirements of official ECB statistics and the analytical data has “a lower quality and certain – sometimes significant – limitations.” Although the ECB observes that the data should be used with caution, it has published the indicators to generate dialogue with “the statistical and research community and with other key stakeholders on how to better capture data on climate-related risks and the green transition.” The ECB intends to work further with national central banks to refine the indicators and to improve both methodologies and data sources.
Executive Board member Isabel Schnabel stated that “we need a better understanding of how climate change will affect the financial sector, and vice versa. For this, the development of high-quality data is key . . . The indicators are a first step to help narrow the climate data gap, which is crucial to make further progress towards a climate-neutral economy.”
Financial regulators around the world increasingly have been driving the financial industry to acknowledge, assess, address and report on sustainability-related risks. In the last few months, for instance, the European Banking Authority published its roadmap on sustainable finance, which outlines the “objectives and timeline for delivering mandates and tasks in the area of sustainable finance and environmental, social and governance (ESG) risks;” the Australian Prudential Regulation Authority conducted a climate vulnerability assessment pursuant to which Australia’s largest banks outlined how they would amend both their risk appetites and lending practices in response to increasing climate-related losses; Sam Woods, Deputy Governor for Prudential Regulation of the Bank of England, has publicly stated that “the most effective firms had undertaken a methodical consideration of how climate risks could impact capital,” and have “demonstrated effective practice by capturing climate in their macroeconomic scenarios or using specific climate scenarios to evidence their assessment of risk;” and the Deputy Governor of the Banque de France, the French central bank, Sylvie Goulard, stated in a speech that central banks need to take more aggressive action regarding nature-related risk given that “monetary assessments of ecosystem services have many limitations,” in part because of their complexity and also because “shocks” in one sector can have significant impacts on other sectors. U.S. financial regulators also have been more active, although still lagging their European counterparts.
Nonetheless, the recent ECB publication demonstrates that challenges remain even for proactive financial institutions seeking to assess and report on climate-related opportunities and risks. Data limitations and the current lack of internationally accepted and harmonized standards on what constitutes a green or sustainable investment remain hurdles. While we anticipate these obstacles to diminish over time, in the current environment, financial institutions should deal with data and taxonomic problems through traditional solid governance procedures and expertise and accurate and thorough disclosure.
(This article originally appeared in Cadwalader Climate, a twice-weekly newsletter on the ESG market.)
The UK Government (Treasury) has published a consultation and call for evidence on a “Future financial services regulatory regime for cryptoassets” which sets out what is being called “phase 2” of the UK’s approach to regulating crypto. This Clients & Friends Memo sets out regulatory measures to date, and discusses significant proposals for an extension of regulated cryptoasset activities.
You can read it here.
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Cadwalader, Wickersham & Taft LLP announced that partners Martin J. Weinstein and Jeffrey D. Clark have joined the firm’s Global Litigation Group in Washington, DC. Weinstein and Clark most recently practiced at Willkie Farr.
Weinstein will serve as head of Cadwalader’s global Compliance, Investigations & Enforcement practice, a similar role to the one he had at Willkie. His practice focuses on investigations, compliance and enforcement activity in almost every industry, spanning more than 60 countries. With more than 30 years of experience, Weinstein is regularly named among the top legal strategists in government enforcement and is recognized as one of the world’s foremost authorities on the U.S. Foreign Corrupt Practices Act (FCPA). He is described as “one of the deans of the FCPA regulatory Bar” by Chambers USA (2021) and has defended many of the biggest FCPA cases in history, representing major global corporations including Lucent, Daimler, Tyco, Teva, Juniper Networks, Alcatel, and Titan.
In addition to his FCPA practice, Weinstein represents corporations, organizations, and executives in a wide variety of other sensitive investigative and enforcement matters, including insider trading, fraud, whistleblowing, healthcare fraud linked to the Anti-Kickback Statute and money laundering. He regularly designs and benchmarks corporate compliance programs, conducts internal investigations worldwide, and counsels on a variety of foreign business practices involving export controls and related matters. He has led many complex high-stakes investigations and multijurisdictional enforcement defenses, has tried more than 40 cases and argued more than a dozen appeals. He has also been involved in a broad range of Congressional inquiries including investigations into campaign finance, international banking practices and complex global trade disputes.
Clark represents corporations and individuals in a wide variety of criminal and civil investigations and enforcement matters, including DOJ and SEC enforcement actions. His practice includes conducting complex, worldwide internal corporate investigations and providing advice to corporate management and directors regarding compliance and enforcement matters. He also counsels companies on designing and implementing corporate compliance programs. Clark focuses on Foreign Corrupt Practices Act matters, and also has substantial experience in other types of international business and white collar litigation.
“Martin and Jeff have been one of the most highly respected compliance and enforcement teams in the country for quite some time,” said Cadwalader managing partner Pat Quinn. “We have been steadily expanding our investigations capabilities in the U.S. and in London and now, with Martin and Jeff, we have established a team that is clearly among the transatlantic market leaders.”
Jason Halper, co-chair of Cadwalader’s Global Litigation Group, added: “Anti-corruption compliance is a key risk area for all of our clients with an international presence, and anti-corruption enforcement is among the top priorities of the Department of Justice and the Securities and Exchange Commission. We also see increased enforcement activity by Biden Administration appointees. We believe this is an optimal time to expand our team and our capabilities for our clients with the addition of two of the top lawyers in the country in this area.”
Added Jodi Avergun, chair of the firm’s white collar defense and investigations practice: “I am delighted to welcome Martin and Jeff to Cadwalader. They add luster and heft to our roster of FCPA investigation practitioners in New York, Charlotte, DC and London and expand our deep bench of former federal prosecutors and enforcement attorneys. They are truly exceptional lawyers, with few peers in the FCPA investigations space, among other areas of expertise. I am very excited that they will be joining our team here in DC and our growing transatlantic practice.”
Weinstein previously served as an Assistant United States Attorney in the Fraud Section of the Northern District of Georgia, focusing his practice on international, corporate finance, government contract, and tax matters. Prior to joining the United States Attorney’s Office, Weinstein was a prosecutor with the United States Department of Justice’s Criminal Section of the Tax Division, serving as lead prosecutor in districts that requested outside counsel with special skills in investment fraud and white-collar offenses.
Clark was formerly a federal prosecutor with the United States Department of Justice. During his seven years as an Assistant U.S. Attorney in the District of New Jersey, Clark served as the Deputy Chief of the Special Prosecutions Division and the Deputy Chief of the Criminal Division. In these capacities, he was responsible for overseeing all of the district’s prosecutions in the areas of public corruption, securities fraud, healthcare fraud, money laundering, immigration fraud, and terrorism. He personally prosecuted a wide variety of white-collar and public corruption cases, serving as lead trial counsel in numerous complex federal criminal trials.
Weinstein and Clark are co-authors of The Foreign Corrupt Practices Act: Compliance, Investigations and Enforcement, a comprehensive practitioner’s book covering all aspects of the FCPA.
“Cadwalader has a long, storied history in government enforcement, compliance and investigations,” Weinstein said. “This is an exceptional, established practice, and Jeff and I are looking forward to the opportunity to expand our practice and our service to clients.”
“As expected, we are seeing increasing government enforcement activity,” Clark added. “This is the perfect time for Martin and me to bring our practice to an elite firm like Cadwalader.”
The arrival of Weinstein and Clark follows the recent addition of a Leveraged Finance and Private Credit team consisting of partners Ronald Lovelace, Patrick Yingling, Jared Zajac, and Joseph Polonsky, as well as the arrival of Corporate partner Michael Pinnisi and Tax partner Andrew Carlon in New York and ESG finance and investment partner Sukhvir Basran and financial regulation partner Alix Prentice in London. Across the firm, in the last 18 months, Cadwalader has also added partners Kenneth Breen and Phara Guberman (White Collar Defense), Angela Batterson (Finance), Jon Brose (Tax), Mike Rupe (Financial Restructuring), Kiran Kadekar (Corporate), Helen Maher (Global Litigation) in New York; Michael Bergmann (Corporate), Peter Malyshev (Financial Services) and Mercedes Tunstall (Financial Services) in Washington, D.C.; and Matthew Smith (Finance) and Bevis Metcalfe (Financial Restructuring) in London.