The week in GRC: House passes roll-back legislation on Dodd-Frank and DoL fiduciary rule comes into effect

– According to the Financial Times, a new SEC team is expected to preside over a decline in both enforcement actions and penalties. ‘The enforcement program is going to change substantially,’ said one Republican who has spoken with Jay Clayton, the agency’s new chair. ‘But it’s not going to change overnight. You can’t turn on a dime.’

In written answers to questions following his confirmation hearing, Clayton told the Senate Banking Committee that he favored targeting ‘fraudulent promoters of local, non-transparent investment opportunities that have some of the hallmarks of penny stock schemes.’ At his confirmation hearing, he signaled a change, stressing ‘individual accountability’ over corporate penalties.


– Bloomberg reported that, according to data from law firm RPC, the number of dawn raids carried out by the UK’s Financial Conduct Authority (FCA) last year was the lowest since the financial crisis, despite the agency increasing its case load. The FCA conducted seven raids in 2016, compared with a decade-high 37 in 2009, as shown by figures obtained by RPC from the regulator.

While the reduction can’t be read as a measure of the FCA’s appetite for enforcement, it’s surprising in light of the new direction taken under the agency’s department head Mark Steward. Since Steward started in October 2015, he’s pushed the enforcement division to pursue all leads, regardless of size or deterrence value, according to current and former FCA employees. The FCA started 70 insider trading probes in 2016, more than double any other year in the last decade, according to data obtained by Bloomberg. A spokesperson for the FCA declined to comment.


– Companies rarely know whether their new CEOs arrive healthy enough to thrive under the extreme pressure the job can impose, The Wall Street Journal said. Fearful of violating US employment laws, businesses typically don’t investigate the health of their incoming chief executive, according to executive recruiters, reference checkers and coaches. But situations where the CEO becomes ill are wake-up calls for boards, management specialists say. They highlight ‘the potential vulnerability to shareholders when a medical condition may prevent a chief executive from doing his or her job,’ said Paul Winum, a senior partner at RHR International, a leadership-development firm. ‘This is something that will get more attention.’


– The SEC will have to find fraud more quickly after the US Supreme Court ruled to limit its power to claw back ill-gotten gains, the WSJ reported. In a unanimous opinion, the court said the SEC has five years to sue suspected wrongdoers after the fraud occurs. The court’s decision could impinge on cases alleging corporate misconduct, including those targeting violations of federal anti-corruption laws. An SEC spokesperson declined to comment on the court’s opinion or its impact on other cases.


– Bloomberg reported that President Donald Trump has picked Joseph Otting, a former lieutenant of Treasury secretary Steven Mnuchin’s at OneWest Bank, to lead the Office of the Comptroller of the Currency (OCC). If confirmed by the Senate, Otting will play a central role in trying to ease rules the Trump administration blames for stunting economic growth. The appointment would mark a reversal of roles for Otting, as the OCC regulated OneWest when he was the bank’s CEO. The selection continues Trump’s tendency to fill government jobs with former finance executives, even though he routinely criticized the industry on the campaign trail.


– According to the Guardian, Amazon, Etsy, Kickstarter, Mozilla and Vimeo all intend to hold a day of protest on July 12 in opposition to plans by Ajit Pai, the new head of the Federal Communications Commission (FCC), to neuter tough 2015 rules meant to protect net neutrality – the concept that all traffic should be equal online.

Pai pledged last year to take a ‘weed whacker’ to rules that regulate internet service providers (ISPs) like any other companies providing utilities such as water or electricity, arguing that they were too onerous on cable companies and stifled innovation. Michael Cheah, general counsel of Vimeo, said: ‘Net neutrality made it possible for Vimeo, along with countless other start-ups, to innovate and thrive. The FCC’s proposed rollback of the 2015 open-internet rules threatens to impede that innovation and allow a handful of incumbent ISPs to determine winners and losers.’


– The WSJ said CSX Corp CEO Hunter Harrison addressed the railroad’s shareholders and reassured them that he is able to lead a turnaround despite an undisclosed medical condition that requires supplemental oxygen. He told the audience at the annual shareholder meeting that the board is ‘fully apprised of my medical condition’ and that his doctor has cleared him to work.

Shareholders overwhelmingly voted to approve an $84 million payment tied to his decision to join CSX earlier this year. CSX said more than 93 percent of the votes cast were in favor of the reimbursement. All of the company’s directors were also approved at the meeting. Chair Edward Kelly said: ‘The board is satisfied there is no health issue with respect to Hunter’s performance.’


– The US Department of Justice has barred any legal settlements in federal investigations that include donating funds to community organizations or other third-party groups, rather than to those directly harmed by the wrongdoing or involved in the cases, Reuters reported. US Attorney General Jeff Sessions said settlement payments must be directed to victims impacted by the defendants’ actions and then to the federal government. Such agreements were a feature of several US settlements with banks in the wake of the financial crisis, and the change could impact banks and other corporations.


– The Financial Stability Oversight Council was set up after the financial crisis to monitor Wall Street threats that might lead to another crash. But Bloomberg reported that, according to people familiar with the matter, the council under Trump and Mnuchin is studying whether regulations themselves are causing financial instability, rather than preventing it. A key Wall Street contention is that it has become much harder to trade during periods of stress, because banks have retrenched. Financial executives blame restrictions on lenders’ investing and requirements that they hold more capital against risky assets.


– Bloomberg reported that former UBS Group compliance officer Fabiana Abdel-Malek and Walid Choucair were each charged with five counts of insider dealing between June 2013 and June 2014, a court clerk said by phone, reading charges filed by the FCA.

Abdel-Malek had worked as a compliance officer at UBS since 2007, according to her LinkedIn profile, where her surname is listed as Malek. The FCA and a lawyer for Abdel-Malek declined to comment. A lawyer for Choucair didn’t immediately respond to a call seeking comment. A UBS spokesperson wasn’t able to provide a statement immediately.


– The WSJ reported that, according to people familiar with the matter, the SEC is poised to hire as its top mutual fund regulator attorney Dalia Blass, whose spouse is about to step down as chief lawyer for the industry’s trade group. Blass is the leading candidate to head the agency’s division of investment management, the people said. Her husband, David Blass, is general counsel of the Investment Company Institute, and plans to leave the group. Simpson Thacher & Bartlett said in May that he would join the firm as a partner.

Dalia Blass has worked at Ropes & Gray since September 2016. An SEC spokesperson declined to comment. As director, she would replace David Grim, who is still in the job and hasn’t announced plans to leave his role. Grim didn’t immediately respond to a request for comment.


– Trump’s pick for FBI chief, corporate lawyer Christopher Wray, would likely face conflicts of interest at the agency due to his defense work for many big companies and be forced to step aside from some investigations, legal ethics experts said, according to Reuters. ‘If there are investigations of a client, he’d need to recuse himself,’ said Steven Lubet, a legal ethics professor at Northwestern University. Wray and his firm King & Spalding did not respond to requests for comment on potential conflicts. The FBI referred a call on the matter to the US Department of Justice, which did not respond.


– Japanese companies have started seeking more diverse leadership as they acquire businesses overseas, with the recruitment of international talent seen as important to remain competitive, the FT said. In May, Japan’s biggest bank, Mitsubishi UFJ Financial Group, said it will appoint two non-Japanese outside directors for the first time. Among Japanese firms in the Nikkei 225 stock index, 14.7 percent had at least one foreign director on their boards last year, compared with 11 percent in 2013, but still much lower than the 33 percent of FTSE 100-listed companies in the UK, according to recruitment firm Spencer Stuart.


– The WSJ reported that more than 70 countries and jurisdictions signed an agreement limiting the ability of multinationals to exploit divergences between tax treaties, a practice known as ‘treaty shopping’ that enables companies to pay lower taxes. The agreement is part of an attempt by the Organization for Economic Co-operation and Development to limit companies’ ability to shift profits to low-tax locations, a practice known as base erosion and profit shifting. The US wasn’t among the signatories, which include the EU’s member states, China, India and Australia, among others.


– The WSJ reported that the House of Representatives voted 233 to 186 for a sweeping rewrite of the rules governing Wall Street, marking the first time Republicans have successfully passed broad legislation aimed at replacing the Dodd-Frank Act. It is, however, unlikely to become law because it isn’t expected to earn sufficient support to advance in the Senate.

Aspects of the Financial Choice Act could be approved by Congress in smaller pieces or be implemented by the Trump administration. But those officials have laid out a more modest agenda. They are expected to soon release a report outlining the administration’s financial regulatory goals.


– The SEC announced that acting head of enforcement Stephanie Avakian and former federal prosecutor Steven Peikin had been named co-directors of the division of enforcement. Avakian was named acting director of the division in December 2016 after serving as deputy director since June 2014. Peikin served from 1996 to 2004 as an assistant US attorney in the Southern District of New York. He was chief of the office’s securities and commodities fraud task force. Most recently, he was managing partner of Sullivan & Cromwell’s criminal defense and investigations group.


– Starting June 9, all financial advisers providing guidance on retirement accounts must adhere to the new US Department of Labor rule requiring that they act in clients’ best interests, Reuters noted. The rule survived a seven-year battle against the financial services industry, and most recently survived a 60-day delay by the new administration, which has considered repealing or revising it. The government may yet try to weaken or undo parts of the fiduciary standard, and several important parts of the rule are due for completion in January.