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US Regulatory Update


SEC Regulatory Accountability Act

On 12 January, the House of Representatives passed, by a vote of 243-184, H.R. 78, the SEC Regulatory Accountability Act, a legislative proposal introduced by Rep. Ann Wagner (R-MO). The bill would direct the Securities and Exchange Commission (SEC) to conduct cost-benefit analyses before issuing orders or adopting rules, as well as conducting periodic reviews of existing rules.

o   Cost-benefit Analysis: The bill would require the SEC to: (i) before issuing an order or rule under the securities laws, identify the nature and source of the problem that the proposed rule is designed to address; (ii) adopt a rule only after it has been determined that its benefits justify its costs; (iii) identify and assess available alternatives to any rule; and (iv) ensure that any rule is accessible, consistent, written in plain language, and easy to understand.

o   Periodic Review: The bill would require the SEC to: (i) periodically review its existing rules to determine if they are obsolete, ineffective, insufficient, or excessively burdensome; and (ii) modify, expand, or repeal the rules as necessary in accordance with such reviews.

o   Major Rules: If the SEC adopts or amends a “major rule”, which is a rule that is likely to result in: (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.-based businesses to compete with foreign-based businesses, the SEC must also state in its adopting release: (i) the rule’s purpose and intended consequences; (ii) metrics for measuring the rule’s economic impact; (iii) the assessment plan to be used to determine whether the rule has achieved its state purposes; and (iv) any foreseeable unintended or negative consequences of the rule.

Commodity End-User Relief Act

On 12 January, the House of Representatives passed, by a vote of 239-182, H.R. 238, the Commodity End-User Relief Act, a legislative proposal introduced by Rep. Michael Conaway (R-TX). The bill would establish the Office of the Chief Economist within the Commodity Futures Trading Commission (CFTC), direct the CFTC to conduct cost-benefit analyses before issuing orders or adopting rules, require futures commission merchants (FCMs) registered with futures associations to meet certain procedural and reporting requirements, amend swap-dealer registration requirements, and exempt certain swap activities involving non-U.S. persons from U.S. swap compliance requirements.

o   Office of the Chief Economist: The bill would establish the Office of the Chief Economist within the CFTC, which would perform functions and duties as the bill and Commission prescribes.

o   Cost-benefit Analysis: The bill would require the CFTC, through the Office of the Chief Economist, to conduct a cost-benefit analysis before issuing an order or adopting a rule. In making a determination of the costs and benefits, the Commission must consider, among other matters: (i) the protection of market participants and the public; (ii) the efficiency, competitiveness, and financial integrity of futures and swaps markets; (iii) the impact on market liquidity in the futures and swaps markets; (iv) price discovery; (v) alternatives to the proposed order or rule; (vi) the cost of compliance with the proposed order or rule; and (vii) other public interest considerations.

o   FCM Registration: Among other matters, the bill would require FCMs registered with a futures association to: (i) maintain written policies and procedures regarding the maintenance of the residual interest of the member in any customer segregated funds account and any cleared swaps customer collateral account of the member: (ii) use an electronic system to report financial and operational information to the futures associations; and (iii) notify the Commission and associations of instances when the FCM has adjusted net capital in an amount less than the required amount, or when the FCM does not hold sufficient funds in segregated accounts for futures customers.

o   Swap-dealer Registration Requirements: The bill would: (i) bar the CFTC from lowering the dollar-amount threshold for requiring swap dealers to register with the Commission (de minimis threshold) below the current amount of $8 billion, except by affirmative action from a Commission rule; and (ii) under certain circumstances, allow the use of specific financial models to calculate capital requirements for non-bank swap dealers. 

o   Cross-border Regulation of Derivatives Transactions: The bill would require the CFTC to issue a rule that addresses the type of non-U.S. persons that must register with the Commission as a swap dealer, the type of swap activities of non-U.S. persons subject to U.S. swap regulation, and determine circumstances when a person in compliance with swaps regulatory requirements of a foreign jurisdiction will be exempted from the U.S. swaps requirements.

Regulatory Transition

On 14 December 2016, Senate Banking Committee Ranking Member Sherrod Brown (D-OH) and Senators Maria Cantwell (D-WA) and Dianna Feinstein (D-CA) sent a letter to the CFTC Chairman Timothy Massad criticizing the CFTC for delaying the issuance of a final position limits rule and raising concerns about Chairman Massad’s inability to finalize the rule in the two and a half years of his tenure. The lawmakers also noted other rules that have yet to be finalized by the CFTC, including: (i) the de minimis threshold for swap dealing activity; (ii) capital and liquidity rules for swap dealers; (iii) margin requirements for uncleared swaps, and (iv) Regulation Automated Trading (Regulation AT). The lawmakers urged Chairman Massad to “spend his remaining time putting the CFTC in a position to finalize strong [Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)] rules for the derivatives market as contemplated by Congress.”

House Financial Services Committee

On 6 January, House Financial Services Committee Chairman Jeb Hensarlingannounced the committee’s leadership team for the 115th Congress. Of note is the appointment of Rep. Bill Huizenga (R-MI) as the Chairman of the House Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee, which oversees, among other things, all aspects of the SEC’s operations, activities, and initiatives. In a statement, Subcommittee Chairman Huizenga stated that he intends to enact “reforms that will increase efficiency within the financial system, ensure proper liquidity in the markets, and strengthen market structure.”

o   On 10 January, it was reported that Rep. Huizenga’s primary focus in 2017 will be to ease financial regulations for U.S. business. Rep. Huizenga stated that he will push to expand capital and access to credit for businesses, such as reforming rules adopted by the SEC.


Regulatory Efforts to Analyze and Coordinate Dodd-Frank Rules

On 29 December 2016, the Government Accountability Office (GAO) published areport on efforts by regulatory agencies to analyze and coordinate Dodd-Frank Act rules that became effective between July 2015 and July 2016 and the impact of select Dodd-Frank Act rules on financial market stability. The GAO determined that regulators issued final rules for approximately 75 percent of the 236 Dodd-Frank Act provisions that the GAO is monitoring and concluded, among other things, that: (i) the CFTC and prudential regulators coordinated domestically and internationally to harmonize and develop rules on margin requirements for OTC swaps; (ii) designated nonbanks have become more resilient and less interconnected than in prior years; and (iii) increased percentages of collateral for swaps by banks may help against credit loss. However, the GAO noted that the full impact of the Dodd-Frank Act remains uncertain as some of its rules have not been finalized and insufficient time has passed to evaluate others. The GAO indicated that it will continue to monitor the implementation of prior recommendations it has made to improve financial regulators’ cost-benefit analyses, interagency coordination, and impact analysis associated with the Dodd-Frank Act rules.

FSOC Meeting

On 11 January, the Financial Stability Oversight Council (FSOC) held an executive session. The Council: (i) received an update regarding global economic and market development; (ii) discussed the initial staff work on the Council’s 2017 annual report; (iii) received a preliminary update on the review of the quantitative thresholds applied in Stage 1 of the Council’s nonbank financial company designation process; and (iv) received an update regarding recent developments in the short-term funding markets.


Covered Agreement

On 13 January, the U.S. and EU representatives announced that they have finalized a “Covered Agreement” on insurance and reinsurance measures. Under the Agreement, U.S. and EU insurers operating in the other market will only be subject to global prudential insurance group oversight by the supervisors in their home jurisdiction, preserving the primacy of the U.S. regulators’ oversight of U.S. insurance groups and the EU regulators’ oversight of EU insurance groups. The limitations on the exercise of global oversight outside of the home jurisdiction include limits relating to solvency and capital requirements, reporting, and governance. In addition, the Agreement encourages insurance supervisory authorities in the U.S. and EU to continue exchanging supervisory information on insurers and reinsurers that operate in these markets by including standardized memorandum of understanding provisions. The Agreement was provided to Congress on 13 January 2017, in accordance with the Dodd-Frank Act, and the EU will follow the necessary steps, involving the European Council and Parliament, and pursuant to the Treaty on the Functioning of the EU, to sign and formally conclude the Agreement.

o   In a statement, the National Association of Insurance Commissioners (NAIC) indicated that NAIC and state insurance regulators are reviewing the Agreement to ensure that U.S. consumers remain protected and U.S. companies are not competitively disadvantaged relative to foreign insurers.


New SEC Chairman

On 4 January, President-elect Donald Trump announced that he intends to nominate Jay Clayton as the new Chairman of the SEC. In a statement, President-elect Trump stated that Clayton “is a highly talented expert on many aspects of financial and regulatory law” and indicated that the new administration must “undo many regulations which have stifled investment in American businesses.” In a similar statement, Clayton indicated that he would work with President-elect Trump and other key stakeholders to ensure that the financial system “provides investors and our companies with the confidence to invest together in America” and “to set policy that encourages American companies to do what they do best: create jobs.” Once the nomination has been made, it will go to the Senate for confirmation.

o   In a statement, Senate Banking Committee Ranking Member Sherrod Brown (D-OH) criticized Jay Clayton’s potential nomination, stating that “it’s hard to see how an attorney who’s spent his career helping Wall Street…will keep President-elect Trump’s promise to stop big banks and hedge funds from ‘getting away with murder.’” He further stated that she looked forward to “hearing how Mr. Clayton will protect retirees and savers from being exploited, demand real accountability from the financial institutions the SEC oversees, and work to prevent another financial crisis."

SEC OCIE 2017 Examination Priorities

On 12 January, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2017 examination priorities. Areas of focus include: (i) retail investors; (ii) senior investors and retirement investments; (iii) market-wide risks; (iv) FINRA; and (v) cybersecurity.

o   Retail Investors: OCIE will continue several 2016 initiatives to assess risks to investors seeking information, advice, products, and services. In addition, OCIE intends to focus its reviews on firms delivering investment advice through electronic mechanisms, or “robo-advising”, as well as wrap fee programs in which investors are charged a single bundled fee for advisory and brokerage services.

o   Senior Investors and Retirement Investments: OCIE will continue to focus on public pension advisers and will expand its focus on senior investors and individuals investing for retirement. OCIE will broaden its multi-year Retirement-Targeted Industry Reviews and Examinations (ReTIRE)  Initiative to include reviews of investment advisers and broker-dealers that offer variable insurance products to investors with retirement accounts as well as those advisers that offer and manage target-date funds.

o   Market-Wide Risks: OCIE will continue to focus on registrants’ compliance with the SEC’s Regulation Systems Compliance and Integrity (SCI), which was adopted to strengthen the technology infrastructure of the U.S. securities market, and anti-money laundering (AML) rules. New initiatives for 2017 include an evaluation of money market funds’ compliance with the SEC’s amended rules, which became effective in October 2016.

o   FINRA: OCIE will continue conducting inspections of FINRA’s operations and regulatory programs.

o   Cybersecurity: OCIE will continue its ongoing initiative to examine cybersecurity compliance procedures and controls, including testing the implementation of such procedures and controls for broker-dealers and investment advisers.

FINRA Regulatory and Examination Priorities for 2017

On 4 January, FINRA published its 2017 Regulatory and Examination PrioritiesLetter identifying compliance, supervision, and risk management as primary areas for review in 2017. Among other issues, FINRA indicated that it will focus on specific issues relating to: (i) high-risk and recidivist brokers; (ii) sales practices; (iii) financial risks; (iv) operational risks; and (v) market integrity.


Cleared Swap Reporting

On 19 December, the CFTC Division of Market Oversight issued no-action relief to derivatives clearing organizations (DCOs) and reporting entities for certain swaps reporting obligations amended by the cleared swap final rule. Among other things, the cleared swap final rule requires DCOs to: (i) report the termination of swaps accepted for clearing by the DCO; and (ii) report creation data and continuation data for swaps to which the DCO is a counterparty. The cleared swap final rule also: (i) added eight primary economic terms (PET) data fields for cleared swaps; and (ii) added three PET data fields for all swaps. To satisfy such requirements, market participants must coordinate their data flows at multiple levels to bring all entities into compliance, including: (i) swap data repositories (SDRs) providing DCOs with specifications for the original swap termination message and specifications for new PET fields; and (ii) DCOs building systems to collect and report any information that they are required to collect and report. Noting, among other setbacks, that the DCOs did not receive final technical specifications for the original swap termination messages from all SDRs until early December 2016, the Division relieved DCOs of their obligation to report continuation data on original swaps accepted for clearing by the DCO, subject to certain terms and conditions, and extended the application date of such requirements to the earlier of 27 June 2017, or such date that all DCOs that will be reporting original swap termination messages to an SDR have successfully tested the reporting of such termination messages. The Division also relieved any entity reporting a swap from having to report the new PET data fields, subject to certain terms and conditions, and extended the application date of such requirements to the earlier of 27 March 2017, or such date that the SDR to which the reporting entity is reporting a particular swap has updated its data standards and is accepting the new PET data fields in its production environment.

On 19 December, the CFTC Division of Market Oversight issued no-action relief to entities submitting swaps for clearing by DCOs operating under pre-existing exemptive orders or no-action relief that the Commission staff provided (Relief DCOs) for certain swaps termination and reporting obligations. Noting that the Relief DCOs operate under separate provisions requiring them to terminate the Relief DCO original swaps and to report such obligations, the Division relieved Relief DCOs of their obligation to: (i) report swap continuation data for alpha swaps that have been accepted for clearing by a Relief DCO; (ii) report any creation data and continuation data for swaps resulting from novation of an alpha swap accepted for clearing by a Relief DCO, as well as any related swaps that may be entered into as part of post-trade activities, including netting or compression exercises or novations; and (iii) generate a unique swap identifier for swaps created through the process of clearing a swap with a Relief DCO, subject to certain terms and conditions. This relief is set to expire on the earlier of: (i) 31 January 2018; (ii) the effective date of any CFTC rule altering the reporting obligations of any entities with respect to the reporting of such swaps; (iii) the revocation or expiration of any exemptive order issued to such Relief DCO; or (iv) the revocation or expiration of any no-action letter issued to such Relief DCO. Noting also that “Clearing indicator”, “Clearing venue”, and “Cleared or Uncleared” PET data fields (Relief PET Data Fields) reference DCOs, the Division relieved any entity reporting any swap that, at the time it is executed, is intended by the counterparty to be cleared by a Relief DCO from having to report the Relief PET Data Fields on that swap, subject to certain terms and conditions. This relief is set to expire on the earlier of: (i) 31 January 2018; (ii) the effective date of any CFTC rule altering or amending the Relief PET Data Fields; (iii) the revocation or expiration of any exemptive order issued to such Relief DCO; or (iv) the revocation or expiration of any no-action letter issued to such Relief DCO.

Mandatory Clearing Regimes

On 15 December, the CFTC Division of Clearing and Risk issued no-action relief to swap market participants relating to the implementation of mandatory clearing regimes in Australia and Mexico, extending a previous no-action letter. Noting that Australia and Mexico have implemented mandatory clearing regimes, the Division provided no-action relief to permit swap market participants affiliated with counterparties located in Australia or Mexico to rely on the CFTC’s inter-affiliate exemption from mandatory clearing, subject to certain terms and conditions, and extended the availability of the alternative compliance framework for swaps with eligible affiliate counterparties until 31 December 2017.


CFTC Chairman Massad

On 3 January, CFTC Chairman Timothy Massad announced that he intends to leave the Commission at the end of the Obama administration on 20 January 2017. In a statement, Chairman Massad remarked that the Commission has made significant progress in a number of areas that he has prioritized, including implementing the regulatory frameworks for swaps, and has ensured that commercial businesses can continue using the derivatives market efficiently and effectively to hedge routine commercial risk and engage in price discovery. Under his leadership, the Commission has: (i) proposed and adopted margin requirements for uncleared swap transactions; (ii) worked to ensure clearinghouses are stronger and more resilient through enhanced risk surveillance; (iii) implemented new supervisory stress testing; (iv) initiated the development and completion of recovery and wind down plans; and (v) taken significant steps in increasing international coordination and cooperation.

On 10 January, Chairman Massad delivered a speech urging regulators not to reverse the reforms that have been made since the 2008 financial crisis, especially in light of Brexit and the recent U.S. presidential election. Chairman Massad stated that while such reforms may not be perfect, regulators should seek to improve upon such reforms rather than repealing them, as they have made the global financial system more resilient. In addition, Chairman Massad noted that the repeal of financial reforms by certain jurisdictions may lead to an inconsistent global financial system, and urged regulators to facilitate international cooperation when implementing future reforms. Chairman Massad also explored various issues posed by Brexit, as well as focusing on whether the EU will: (i) apply the same equivalence framework to the UK that it did to the U.S. and other countries; and (ii) require enhancements to the ongoing oversight of UK clearinghouses and exchanges. With respect to reforms in the U.S., Chairman Massad highlighted the consequences of central clearing mandates, market liquidity, automated trading, and cybersecurity as possible areas for future regulatory reform.

Swap Data Requirements

On 13 January, the CFTC unanimously proposed amendments to swap data rulesthat implement Congressional action to remove indemnification requirements for the use of swap data by other regulators. Under the Dodd-Frank Act, U.S. and foreign authorities seeking swap data from SDRs must first indemnify the Commission and each SDR from the authorities that receive such data (Indemnification Clause). Congress repealed the Indemnification Clause in December 2015 and the Commission proposed amendments to conform the Commission’s rules to the changes made by Congress. In addition, the amendments would permit U.S. regulators to access SDR swap data by entering into a confidentiality arrangement with the Commission, but will require other U.S. authorities and all foreign authorities to be deemed “appropriate” by the Commission, as well as satisfying other requirements, before accessing swap data. The comment period will close 60 days after publication in the Federal Register.

SEFs and DCMs

On 13 January, the CFTC proposed amendments to certain Commission rulesrelating to registration and review of exchange disciplinary, access denial, and other adverse actions. The amendments would: (i) integrate existing advisory guidance relating to registration and review of exchange actions into the Commission rules; (ii) incorporate swap execution facilities (SEFs) and update provisions currently applicable to designated contract markets (DCMs) relating to the review of exchange actions in the Commission’s rules; (iii) remove and add cross-references to other Commission rules deleted or established under the Dodd-Frank Act in the Commission rules; and (iv) require the publication of final disciplinary and access denial actions taken by SEFs and DCMs on their exchange website. The comment period will close 60 days after publication in the Federal Register.

Recordkeeping Requirements

On 12 January, the CFTC unanimously adopted amendments to the recordkeepingrule aimed at modernizing and making technology-neutral the form and manner in which regulatory records must be kept. The amendments (i) eliminated the requirements that paper records must be kept in their original form, and that electronic records must retain the format in which they were created, and (ii) removed a requirement that a person who only uses electronic storage media to preserve records must enter into an arrangement with a third-party technical consultant who can furnish the Commission with the information promptly upon request by the Commission.

o   In a statement, Chairman Massad stated that such an amendment “is an example of how the Commission is focusing on issues related to technological change.” Chairman Massad also noted that while technological innovations may come from the private sector, it is the role of the Commission to “ensure that the Commission’s rules do not stand in the way of their potential.”


NYDFS Cybersecurity Regulation

On 28 December 2016, the New York Department of Financial Services (NYDFS)published an updated version of its proposed cybersecurity regulation and postponed the effective date from 1 January 2017 to 1 March 2017. Among other things, the cybersecurity regulation would require covered entitles to: (i) establish a cybersecurity program; (ii) adopt a written cybersecurity policy; (iii) designate a Chief Information Security Officer (CISO); (iv) conduct periodic penetration testing and vulnerability assessments; (v) report cybersecurity events; and (vi) ensure that the board of directors of the covered entity review the cybersecurity policy. Based on the current effective date of 1 March 2017, firms must: (i) file their initial Certification of Compliance by 15 February 2018; (ii) file the initial CISO report, conduct penetration testing and vulnerability assessments, conduct risk assessments, and establish training by 1 March 2018; and (iii) complete their audit trail, establish application security, establish limitations on data retention, monitor their authorized users, and encrypt nonpublic information by 1 September 2018. The comment period will close on 27 January 2017.  The NYDFS has also made several major changes in the revised proposed regulations, including:

o   Risk-Based Approach: Rather than taking a “one-size-fits-all” approach, many requirements for the cybersecurity program and policy have been amended to tie into the institution’s risk assessment.

o   Risk Assessment: The risk assessment process has been amended both with respect to the frequency and scope of the assessments. The frequency requirement has been amended from requiring a risk assessment “at least annually” to requiring a “periodic risk assessment that is sufficient to inform the design of the cybersecurity program.” The scope of the assessments has been amended to exclude information systems that do not contain or utilize nonpublic information.

o   Board-level Review: The review process has been amended so that the board of directors, or an appropriate board committee, or a senior officer may approve the institution’s cybersecurity policy, rather than just the board of directors.

o   CISO Designation: The revised regulation now defines the role of the CISO by function, rather than by title, to account for personnel that may already be performing functions as required by the regulation. The CISO’s report is also now required annually, rather than bi-annually.

o   Materiality: The revised regulation now includes a “materiality” threshold for cyber-events that must be reported to the NYDFS, although materiality is not defined in the regulation.

o   Nonpublic Information: The revised regulation narrows key aspects of the definition of nonpublic information with respect to “individuals”, such as narrowing the type of information that could be used to distinguish or trace an individual’s identify.

o   Reliance on Affiliate: The revised regulation includes a new provision that allows covered entitles to meet cybersecurity program requirements by adopting those of an affiliate, that meets the requirements of the NYDFS revised regulation, as well as allowing a covered entity to use the CISO of an affiliate.

o   Other Exemptions: The revised regulation also provides several new exemptions from the regulation’s requirements, including; (i) an exemption from most requirements for covered entities with fewer than 10 employees, or with less than $5 million in gross annual revenue for each of the last three fiscal years, or with less than $10 million in year-end assets; (ii) an exemption for employees, agents, designees, or other representatives of a covered entity from having to develop their own cybersecurity programs if they are a covered entity themselves, so long as they are covered by the initial covered entity’s cybersecurity program; and (iii) an exemption for covered entities from several requirements if they do not use, operate, maintain, or control an information system and if they do not receive or possess nonpublic information.


On 6 January, Rep. Joe Wilson (R-SC) introduced a legislative proposal, the Protecting American Families’ Retirement Advice Act, to provide for a two-year delay in the effective date of the Department of Labor (DOL) fiduciary rule. In astatement, Rep. Wilson stated that the “DOL’s fiduciary rule is one of the most costly, burdensome regulations to come from the Obama Administration” and that this legislative proposal “will delay the implementation of this job-destroying rule, giving Congress and President-elect Donald Trump adequate time to re-evaluate this harmful regulation.”

In the December 2016 edition of the SEC Investor Management Guidance Update, the SEC provided guidance to funds and investment advisors on issues relating to the implementation of the DOL fiduciary rule and certain SEC rules. Noting that many of its rules will interact intimately with the DOL rulemaking, the SEC provided guidance with respect to: (i) variation in sales leads and the disclosure of sales leads in prospectuses and appendices; (ii) the offering of new share classes that differ in relation to sales loads, transaction charges, and certain ongoing expenses; (iii) requesting a selective review of a filing that is not substantially different from disclosures contained in prior fillings by the fund; and (iv) providing template filing relief for fund complexes that make substantially identical changes to multiple funds.


o    17 January: comments due on SEC final rule to promote effective liquidity risk management for open-end investment companies.

o    17 January: comments due on SEC final rule to modernize the reporting and disclosures by registered investment companies.

o    17 January: comments due on advanced notice of proposed rulemaking by the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corp. (FDIC) on enhanced cyber-risk management standards for large and interconnected entities.

o    24 January: comments due on CFTC supplemental notice of proposed rulemaking to Regulation AT.

Ianthe Zabel
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