US Regulatory Update
Financial CHOICE Act of 2017
On 6 June, the House of Representatives passed, by a vote of 233-186 along party lines, the Financial CHOICE Act of 2017, H.R. 10, a bill introduced by House Financial Services Committee Chairman Jeb Hensarling (R-TX) in late April. However, as The Hill reports, “The CHOICE Act is unlikely to pass the Senate, where the Republican majority is too slim to overcome a Democratic filibuster.”
- Notable provisions of the bill include: (i) repeal of the Department of Labor’s (“DOL”) fiduciary duty rule (which partially took effect on 6 June, 2017); (ii) reform of the Federal Reserve System’s governance structure and operations; (iii) repeal of Orderly Liquidation Authority, a provision of Dodd-Frank which authorizes the FDIC to resolve failing bank holding companies or non-bank financial firms; (iv) repeal of the authority of the Financial Stability Oversight Council (“FSOC”) to designate non-bank firms as systemically important financial institutions (“SIFIs”); (v) creation of a new chapter in the Bankruptcy code to enable the wind-down of failing large financial firms; (vi) elimination of the Federal Insurance Office and the independent insurance member on the FSOC; (vii) creation of an Office of the Independent Insurance Advocate as a bureau within the Treasury Department; and (viii) placement of the Independent Insurance Advocate as a voting member on the FSOC.
DEPARTMENT OF TREASURY: REGULATORY REFORM
Treasury Report on Bank and Credit Union Regulation to President Trump
On 12 June, the Department of Treasury published its first in a series of reports to President Trump on the extent to which financial regulations can be reformed to be consistent with the “Core Principles” enumerated in President Trump’s February 2017 Executive Order. Treasury’s review of financial regulations will be divided into four separate stages, culminating in this first report focusing on the “depository system, covering banks, saving associations, and credit unions,” as well as three future reports on the following topics: (i) “capital markets: debt, equity, commodities and derivatives markets, central clearing and other operational functions”; (ii) “the asset management and insurance industries, and retail and institutional investment products and vehicles”; and (iii) “non-bank financial institutions, financial technology, and financial innovation.” According to the first report, reviews related to Presidential Memoranda on Orderly Liquidation Authority and FSOC, both signed on 21 April 2017, will be provided in future reports to the President. Reuters reports that Counselor Craig Philips, a top aide to Treasury Secretary Steven Mnuchin and co-author of the report, indicated that subsequent reports would be published after September 2017.
- Among other things, the first report recommends that: (i) independent financial regulatory agencies, such as the CFTC, SEC, and Federal Reserve, “perform and make available for public comment a cost-benefit analysis with respect to at least all ‘economically significant’ proposed regulations” (a classification established by Executive Order 12866) and should “seek to achieve greater consistency in their methodology and use of cost-benefit analysis,” as set out by Executive Order 12866; (ii) financial regulatory agencies work together to harmonize cybersecurity regulations and establish a “common lexicon” related to these rules; (iii) Congress “exempt banking entities with over $10 billion in assets that are not subject to the market risk capital rules from the proprietary trading prohibitions of the Volcker Rule”; and (iv) Congress “reduce fragmentation, overlap, and duplication in financial regulation,” and grant the FSOC expanded powers to achieve these goals, such as the ability to “appoint a lead regulator on any issue on which multiple agencies may have conflicting and overlapping regulatory jurisdiction.”
Department of Treasury Budget Hearing
On 12 June, the House Appropriations Subcommittee on Financial Services and General Government held a hearing on the Department of Treasury’s fiscal year (“FY”) 2018 budget. Among other things, Treasury Secretary Mnuchin testified that: (i) “70 or 80 percent” of the recommendations provided in the Treasury’s first report to President Trump could be effectuated through regulatory actions without having to obtain legislative approval; (ii) with respect to the Volcker Rule, his “biggest concern is…to make sure that market makers can provide liquidity in market making”; and (iii) cybersecurity should be a focus of regulatory cooperation and coordination. Treasury Secretary Mnuchin declined to comment on the FSOC’s activities surrounding the designation of nonbanks as systemically important financial institutions.
Department of Treasury Request for Information
On 14 June, the Department of Treasury requested information and recommendations from the public regarding Treasury regulations that can be “eliminated, modified, or streamlined” as mandated by President Trump’s 24 February Executive Order to identify regulations for repeal, replacement, or
modification. The Department request that commenters: (i) “explain how regulations could be modified, if appropriate, or why regulation should be eliminated”; and (ii) “to the extent available, provide available data and an explanation of regulatory costs and compliance burdens” regarding the modification or elimination of regulations.
National Flood Insurance Program
On 15 June, the House Financial Services Committee passed two legislative proposals regarding the reauthorization of the National Flood Insurance Program (“NFIP”). The Committee passed the 21st Century Flood Reform Act of 2017 (H.R. 2874), by a vote of 30-26, and the National Flood Insurance Program Policyholder Protection Act of 2017 (H.R. 2868), by a vote of 53-0. The Committee will reconvene on 21 June 2017 to mark up the remaining bills to related to the NFIP, including: (i) the Flood Insurance Market Parity and Modernization Act (H.R. 1422); (ii) the Repeatedly Flooded Communities Preparation Act (H.R. 1558); (iii) the Taxpayer Exposure Mitigation Act of 2017 (H.R. 2246); (iv) an act to “require the use of replacement cost value in determining the premium rates for flood insurance coverage under the National Flood Insurance Act” (H.R. 2565); and (v) the National Flood Insurance Program Administrative Reform Act of 2017 (H.R. 2875).
o 21st Century Flood Reform Act of 2017: Among other things, the bill would, according to the section-by-section summary provided by the Committee: (i) “decrease the cap on annual rate increases from 18 to 15 percent”; (ii) require the [Federal Emergency Management Agency (“FEMA”)] to establish a “transparent public process to explain and engage with the public on its methodology to determine annual risk premium rates for NFIP coverage”; (iii) repeal regulation that currently “prevents insurers participating in the NFIP’s Write Your Own (WYO) Program from selling both NFIP and private flood insurance policies”; (iv) decrease the maximum allowance paid to companies administering the WYO Program from 32 to 25 percent of the chargeable premium for “flood insurance coverage made available under the NFIP”; and (v) raise from $2,000 to $5,000 the penalties imposed on “federally regulated lenders for failure to comply with the NFIP’s mandatory purchase requirements.”
o National Flood Insurance Program Policyholder Protection Act of 2017: According to the section-by-section summary by the Committee, the bill would, among other things: (i) “limit the chargeable risk premium of any single family residential property to $10,000 per year”; and (ii) allow FEMA to reduce the risk premium rate charged to “policyholders who are not eligible for preferred risk rate method premiums” if such policyholders carry out certain actions to “mitigate the flood risk of their property”.
International Capital Standards
On 14 June, Senators Dean Heller (R-NV) and Jon Tester (D-MT) introduced S. 1360, which would require the Board of Governors of the Federal Reserve System (“Fed”) to establish an “Insurance Policy Advisory Committee on International Capital Standards and Other Insurance Issues.” Additionally, the bill would, among other things, prevent the Treasury Secretary and the Fed from approving any international capital insurance standards unless: (i) the text of any such standard has been published in the Federal Register and made available for public comment for not less than 30 days; (ii) a copy of any such standards have been submitted to Congress; (iii) it has been determined that any such standards are “not inconsistent with capital requirements set forth in the State-based system of insurance regulation”; and (iv) where such standards will be applied to a company currently supervised by the Fed, the international standards are not inconsistent with the Fed’s capital requirements for that company.
SEC Enforcement Directors
On 8 June, the SEC announced the appointment of Stephanie Avakian, Acting Director of the Division of Enforcement, and Steven Peikin, Managing Partner at Sullivan and Cromwell, as Co-Directors of the Division of Enforcement. Reutersreports that both Avakian and Peikin identified cybersecurity as their highest priority for 2017.
CFTC Commissioner Bowen to Leave the CFTC Soon
On 20 June, CFTC Commissioner Sharon Bowen announced at the Market Risk Advisory Committee meeting that she intends to “leave the Commission within the next few months, or perhaps sooner if another nominee is confirmed.”
CFTC Commissioner Nominee
On 9 June, the White House announced that President Donald Trump intends to nominate Dawn DeBerry Stump, a former vice-president at the New York Stock Exchange Euronext, for a Republican Commissioner seat on the CFTC.
CFTC: BUDGET & DERIVATIVES
House Appropriations Subcommittee Hearing on the CFTC FY 2018 Budget
On 8 June, the House Appropriations Subcommittee on Agriculture, Rural Development and Related Agencies held a hearing on the CFTC’s FY 2018 budget. CFTC Acting Chairman and Chairman nominee J. Christopher Giancarlo defendedthe CFTC’s budget request of $281.5 million (a $31.5 million increase from its current funding and the funding proposed by the Presidential Budget published on 23 May 2017), arguing that the request was not a “formulaic or superficial number, but a thorough and informed assessment of what the CFTC needs to execute its mission in FY 2018.” Acting Chairman Giancarlo’s written remarks explain that the additional resources would, among other things, be used to: (i) increase “monitoring of systemic risk in the derivatives markets, in particular with regard to central counterparty clearinghouses” (“CCPs”); (ii) “fulfill the Presidential Executive Order on Core Principles” by engaging in “more rigorous regulatory impact analysis that addresses systemic risk and market failures”; (iii) conduct better “quantitative assessments of costs and benefits” with respect to future rule-makings; and (iv) “to increase staffing and resources to address [FinTech].” Acting Chairman Giancarlo also reiterated the Commission’s support to streamline its processes and focus on more efficient resource usage through (i) the recently launched KISS Initiatives; (ii) cooperating more with other federal regulators; and (iii) “delegat[ing] responsibility to the National Futures Association and other SROs” where appropriate. When questioned by Subcommittee Chairman Robert Aderholt (R-AL) about the CFTC’s swap dealer de minimis threshold drop from $8 billion to $3 billion and whether this would negatively affect the industry, SIFMA reports that Acting Chairman Giancarlo stated that the current threshold properly captures “Wall Street” firms and that a drop in the threshold as anticipated would likely result in a decrease in trading activity, causing a loss of liquidity for smaller firms. When questioned by Rep. Rosa DeLauro (D-CT) about swap data reporting requirements, Acting Chairman Giancarlo expressed his support for further Dodd-Frank Act Title VII reform, and indicated that he intends to release a road map for swap data reporting reform.
Managed Fund Association Recommendations to the CFTC
On 6 June, the Managed Fund Association (“MFA”) sent a letter to CFTC Acting Chairman Giancarlo outlining the group’s “priority issues and related requests concerning the Commission’s regulatory activity that affect the private fund industry.” Among other things, the MFA presented a number of priority issues, requesting that, among other things, the CFTC: (i) work with the SEC to address the overlap between “investment manager registration and systemic risk/compliance reporting requirements” of the CFTC and SEC; (ii) “abandon its reproposed position limits rule”; (iii) improve its swap trading framework by “allow[ing] investors more flexibility in how they trade swaps,” “assum[ing] responsibility for determining when particular swap contracts have to be [swap execution facility] traded,” and “simplify[ing] and codify[ing] the existing universe of CFTC staff guidance and no-action relief that the CFTC” uses to implement its swap execution facility framework; (iv) “continue using the subpoena process for requesting confidential, commercially valuable intellectual property” and protect confidential information; and (v) “abandon Regulation AT” and its supplemental proposal because it would “apply a very prescriptive, unnecessary, one-size-fits-all regulatory framework on many different types of market participants.”
DOL FIDUCIARY DUTY RULE
On 8 June, lawmakers introduced two legislative proposals aimed at repealing the DOL’s Fiduciary Duty Rule. Rep. David P. Roe (R-TN) introduced in the House of Representative the Affordable Retirement Advice for Savers Act (H.R. 2823) and Sen. Johnny Isakson (R-GA) introduced in the Senate the Affordable Retirement Advice Protection Act (S.1321). Both bills aim to repeal and replace the DOL Fiduciary Duty Rule’s definition of a “fiduciary” with a new statutory definition of “investment advice” that is less restrictive and based on certain enumerated criteria. The bills would also provide a broader “prohibited transaction” exemption for variable compensation and recommendations.
On 6 June, the DOL sent a proposed request for information on parts of the Fiduciary Duty Rule scheduled to go into effect on 1 January 2018 to the Office of Management and Budget for review. Soon thereafter, Bloomberg reported that DOL Deputy Assistant Secretary for Program Operations of the Employee Benefits Security Administration Timothy D. Hauser indicated that certain parts of the Fiduciary Duty Rule may have their applicability date further delayed as the department considers further changes to the Rule.
FINTECH AND MARKET REGULATION
FINRA Launches FinTech Initiative
On 13 June, FINRA announced the launch of an “Innovation Outreach Initiative” to assist FINRA in better understanding and utilizing FinTech innovations in the securities industry. FINRA established a cross-departmental team to carry out the initiative, which will include: (i) establishing a Fintech Industry Committee to foster discussions regarding interactions between FINRA rules and programs and FinTech; (ii) conducting regional roundtables for market participants to discuss FinTech related topics; (iii) producing publications on FinTech topics; (iv) bolstering FINRA’s processes for industry cooperation, including training for FINRA staff responsible for communicating with market participants on FinTech related topics; and (v) enhancing collaboration with other domestic and foreign regulators.
UPCOMING EVENTS AND DEADLINES
o 22 June: SEC Investor Advisory Committee Meeting to discuss capital formation, initial public offerings, and certain provisions of the Financial CHOICE Act relating to the SEC.
o 22 June: Senate Agriculture Committee hearing on the nomination of CFTC Acting Chairman J. Christopher Giancarlo as CFTC Chairman.
o 23 June: North American Securities Administrators Association cybersecurity roundtable.
o 30 June: deadline to file notice with CFTC regarding third-party record keeping.
o 13 July: FINRA Blockchain Symposium in New York City.