US Regulatory Update
House Financial Services Committee Passes Four Bipartisan Bills
On 25 July, the House Financial Services Committee passed four bipartisan bills, including the Financial Stability Oversight Council Insurance Member Continuity Act (H.R. 3110), by a vote of 60-0. As noted by the Committee release, the bill would “permit the Financial Stability Oversight Council’s (FSOC) Independent Member with Insurance Expertise, after the expiration of his or her term, to serve on the FSOC until the earlier of 18 months after the date on which the term of service ends; or the date on which a successor to such member is appointed and confirmed.” The term for the current FSOC Independent Insurance Member is set to expire in September.
- The other three bills related to (i) improving access to capital for smaller reporting companies through a streamlined SEC review process, (ii) the treatment of municipal securities in computing a financial institution’s Highly Qualified Liquid Assets (part of the Liquidity Coverage Ratio calculation), and (iii) World Bank reforms.
SIFIs & FINANCIAL STABILITY
On 28 July, Treasury Secretary Steven Mnuchin convened a meeting of the FSOC. The participants discussed: (i) “potential improvements to the Volcker Rule, including the recommendations regarding the Volcker Rule in the Treasury Department’s June 2017 report issued pursuant to Executive Order 13772, ‘Core Principles for Regulating the United States Financial System’”; (ii) “the ongoing annual reevaluation of its designation of a nonbank financial company”; and (iii) “the pending litigation brought by MetLife challenging its designation by the Council in December 2014.” The FSOC also approved the minutes of the previous meeting on 8 May 2017, in which the participants and meeting guests (U.S. and state government financial regulatory officials) discussed, among other things: (i) the “presidential memorandum on council designations”; (ii) an “update on annual reevaluation of nonbank financial company designation”; (iii) “interagency regulatory collaboration”; and (iv) President Trump’s Executive Order on Core Principles for Regulating the U.S. Financial System.
Systemic Risk Designation Improvement Act
On 19 July, Rep. Blaine Luetkemeyer (R-MO) reintroduced in the House of Representative the Systemic Risk Designation Improvement Act. The bill would replace the $50 billion threshold for designating a bank holding company as a Systemically Important Financial Institution (SIFI) with “a series of well-established standards that more accurately measure systemic importance,” according to Rep. Luetkemeyer’s press release. Specifically, these standards would include “an institution’s size, interconnectedness, substitutability, global cross-jurisdictional activity, and complexity.”
The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System
On 27 July, the House Financial Services Committee held its annual hearing on the “State of the International Financial System” with the Secretary of the Treasury. When questioned by Rep. Blaine Luetkemeyer (R-MO) as to whether the FSOC should designate SIFIs based on “an arbitrary figure” or use a “more risk-based analysis,” as proposed by the Systemic Risk Designation Improvement Act sponsored by Rep. Luetkemeyer, Treasury Secretary Steven Mnuchin indicated that he supported a hybrid approach in which there was an objective regulatory “floor,” above which firms would be designated based on a “risk analysis.” When questioned by Committee Chairman Jeb Hensarling (R-TX) as to whether the $50 billion threshold for SIFI designations should be raised and what a new threshold should be, Mnuchin indicated that the threshold should be “raised substantially, at least to $250 or $300 billion.”
Nominees for Federal Reserve Vice Chairman of Supervision and Comptroller of the Currency Testify on FSOC
On 27 July, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the nomination of, among others, Randal Quarles to be the Federal Reserve’s Vice Chairman of Supervision and Joseph Otting to be the Comptroller of the Currency. When questioned by Committee Chairman Mike Crapo (R-ID) as to whether (i) the $50 billion SIFI threshold should be changed, (ii) the Volcker Rule should be reviewed, (iii) the supplemental leverage ratio should be revisited, and (iv) the $10 billion threshold for company-run stress tests should be raised, Quarles responded in the affirmative. When questioned by Sen. Pat Toomey (R-PA) as to whether the FSOC should suspend its designation of additional nonbank SIFIs until it has improved its “badly flawed” and “opaque” designation process, Otting responded in the affirmative and stated that the FSOC should provide “greater definition” to the process before designating any additional nonbank SIFIs. When questioned by Sen. Tim Scott (R-SC) whether insurance firms pose the same “systemic risk” as banking institutions, Quarles responded that it “would be difficult to say that the business of insurance poses the same systemic risk as banking,” as systemic risk arises from “short-term liabilities that can all be called very quickly” and such a scenario would not be a “practical one to consider” for the business of insurance.
On 19 July, President Trump nominated Hester Maria Peirce, a senior research fellow at the Mercatus Center at George Mason University and director of the Center’s Financial Markets Working Group, for a Republican Commissioner seat on the SEC. Ms. Peirce was nominated by former President Barack Obama to be a Commissioner of the SEC in October 2015, but her nomination was never brought to a vote before the full Senate.
SEC & SECURITIES
SEC Chairman Jay Clayton Speech and Discussion
On 27 July, SEC Chairman Jay Clayton delivered a speech at the National Compliance Outreach Program for Broker-Dealers focused on regulatory coordination, especially between the SEC and FINRA. Chairman Clayton stated that “[c]oordination with FINRA is a particular focus for the SEC’s National Exam Program” and that he was “pleased to learn that [the Office of Compliance Inspections and Examinations] staff regularly share exam plans and findings with FINRA, and also frequently meet with FINRA staff to discuss exam and other regulatory issues.” Chairman Clayton highlighted the importance of “coordination and open communication between regulators and the industries that they regulate.”
On 26 July, Chairman Clayton participated in a discussion at the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness. As reported by Reuters, Chairman Clayton discussed: (i) the Department of Labor’s (“DOL”) Fiduciary Duty Rule, stating that “‘a substantial reduction in choice for the individual investor’” would be “extremely disappointing” and expressing his concern over a regulatory system with two competing frameworks from the SEC and DOL; (ii) “the proliferation of shareholder proposals and the power proxy advisory firms wield over corporate governance”; and (iii) his interest in facilitating an environment that further incentivizes companies to go public.
SEC’s Investment Adviser Examination Completion Process
On 21 July, the SEC’s Office of Inspector General (OIG) published a final report on the results of its audit of the Office of Compliance Inspections and Examinations’ (OCIE) investment adviser examination completion process. The OIG indicated that the “controls over OCIE’s [investment adviser] examination completion process are generally effective,” but OIG “identified deficiencies in OCIE’s [investment adviser] examination completion controls that warrant management’s attention,” including: (i) two controls “regarding control sheets and post-exam fieldwork lacked adequate segregation of duties”; (ii) examiners did not always document preliminary exit interviews with examined” investment advisers; and (iii) “examiners either did not assign final risk ratings, or may have assigned final risk ratings inconsistently.” The OIG indicated that “[t]hese deficiencies occurred because sufficiently robust policies and controls were not in place to prevent their occurrence” and that “OCIE can improve its [investment adviser] examination completion process and internal controls by updating or documenting policies and procedures consistent with the Standards for Internal Control in the Federal Government.”
SEC’s Enforcement Program
On 27 July, the SEC held a national compliance outreach program for broker-dealers. As reported by the Wall Street Journal, Peter Driscoll, the Acting Director of the SEC’s Office of Compliance Inspections and Examinations, indicated that the SEC “likely won’t continue to blanket most private-equity firms for regulatory violations” and will “[g]enerally…focus more on retail investors” going forward. As reported by Financial Advisor, Driscoll also indicated that the SEC’s examination of investment advisors could increase by 30 percent in 2017.
SEC’s Control of Financial Systems
On 27 July, the Government Accountability Office (GAO) published a report on the “effectiveness of SEC’s internal control structure and procedures for financial reporting.” The GAO indicated that the SEC has “improved the security controls over its key financial systems and information,” including resolving “47 of the 58 recommendations [the GAO] had previously made,” but that the SEC has not completely implemented the eleven other recommendations, which included: (i) “consistently protecting its network boundaries from possible intrusions”; (ii) “identifying and authenticating users”; (iii) “authorizing access to resources”; (iv) “auditing and monitoring actions taken on its systems and network”; and (v) “encrypting sensitive information while in transmission.” The GAO concluded that “[u]ntil [the] SEC mitigates these deficiencies, its financial and support systems and the information they contain will continue to be at unnecessary risk of compromise.”
CFTC Commissioner Nominations Hearing
On 27 July, the Senate Committee on Agriculture, Nutrition, and Forestry held a hearing on the nomination of Rostin Behnam, Brian Quintenz, and Dawn DeBerry Stump as CFTC commissioners. When questioned by Chairman Roberts on the nominees’ views regarding positions limits and the de minimis threshold, all three nominees expressed their support for establishing a positon limits rule. When questioned by Ranking Member Debbie Stabenow (D-MI) about how the nominees would address cybersecurity issues, Behnam argued that the CFTC should coordinate and collaborate with other financial regulators, and Quintenz and Stump echoed these sentiments.
Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers
On 25 July, the CFTC’s Divisions of Swap Dealer and Intermediary Oversight, Clearing and Risk, and Market Oversight issued a no-action letter extending relief to CFTC-registered swap dealers “established under the laws of jurisdictions other than the United States” (“non-U.S. swap dealers”) from “certain transaction-level requirements” and extending previous no-action letters. As explained in the 25 July no-action letter, swap dealers entering into a swap must “comply with certain ‘Transaction-Level Requirements’ with respect to the transaction.” On 14 November 2013, the Division of Swap Dealer and Intermediary Oversight issued an advisory stating that a non-U.S. swap dealer “regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute a swap with a non-U.S. person generally would be required to comply with the Transaction-Level Requirements.” Subsequently, several non-U.S. swap dealers requested time-limited relief from the Division from transaction-level requirements, arguing that they required additional time to comply with the requirements in order to avoid market disruptions for non-U.S. counterparties. In their 25 July 2017 letter extending relief, the three Divisions stated that the CFTC “continues to diligently assess the many issues that must be addressed to ensure an appropriate balance between domestic and foreign regulatory interests with respect to the domestic activity” of non-U.S. swap dealers.
DOL FIDUCIARY DUTY RULE
On 19 July, the U.S. House Committee on Education and the Workforce passed, by a vote of 23-17, the Affordable Retirement Advice for Savers Act (H.R. 2823), introduced by Rep. David P. Roe (R-TN). Among other things, the bill aims to repeal the DOL Fiduciary Duty Rule’s definition of a “fiduciary” and replace it with a new statutory definition of “investment advice” that is less restrictive and based on certain enumerated criteria. The bill would also provide a broader “prohibited transaction” exemption for variable compensation and recommendations.
On 19 July, the House Appropriations Committee’s Subcommittee on Labor, Health and Human Services, Education, and Related Agencies passed, by a vote of 28-22, the Fiscal Year 2018 Labor, Health and Human Services, Education Funding Bill. Among other things, the bill would prohibit enforcement of the DOL Fiduciary Duty Rule.
On 25 July, SEC Commissioner Michael Piwowar filed, on his own behalf, a comment letter with the DOL responding to the DOL’s 29 June 2017 “request for information” on its Fiduciary Duty Rule. Commissioner Piwowar argued that the Rule: (i) “is dismissive of the efficacy of conflict of interest disclosure, a view that runs contrary to decades of [SEC] experience”; (ii) “fails sufficiently to distinguish ‘selling’ activities from ‘advice’ activities, undermining the [SEC’s] longstanding approach to regulation of broker-dealers and investment advisers”; and (iii) will have impacts that “extend beyond retirement accounts and will be disruptive of the broker-client relationship in general.”
- Efficacy of Conflict of Interest Disclosure: Commissioner Piwowar noted that “disclosure and full-information is a solution to conflict problems,” reminded the DOL that the SEC has “carefully weighed the effectiveness of disclosure throughout the course of its eight decades of existence,” and encouraged the DOL “to redouble its efforts to work with the [SEC] and its expert staff, who may bring to bear our decades of experience in enforcing multiple disclosure-based regimes.”
- Distinguish “Selling” Activities from “Advice” Activities: Commissioner Piwowar argued that those in favor of “the creation of a uniform fiduciary duty for broker-dealers and investment advisers” sometimes mistakenly assume that the “broker-dealer’s duties have less ‘bite’ than an investment adviser’s obligations.”
- Effects of the Fiduciary Duty Rule will Extend Beyond Retirement Accounts: Commissioner Piwowar argued that while the Fiduciary Duty Rule was “targeted narrowly to the ERISA plan and IRA account markets,” it will nevertheless have “significant, unintended consequences for the broader relationship between the consumers and the providers of financial services” as “a broker-dealer subject to the Fiduciary Rule with respect to a client with an ERISA or IRA account will feel compelled to apply the same standard to that client’s other securities accounts.”
UPCOMING EVENTS AND DEADLINES
- 7 August: comments due on DOL’s request for information relating to the basis of new exemptions or changes/revisions to the Fiduciary Duty Rule and its prohibited transaction exemptions.
- 21 August: comments due on the CFTC’s comprehensive review of its swap data reporting regulations.