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US Regulatory Research

US Regulatory Updates

US Regulatory Update


On 8 December, a continuing resolution to fund the government through 22 December, H.J.Res.123, was signed into law. The resolution extended the current Continuing Appropriations Act of 2018 (Division D of Public Law 115-56), which expired on 8 December 2017. In addition to ensuring that the government will be funded through 22 December 2017, the resolution provided funding changes and extended the authorization of the National Flood Insurance Program through 22 December 2017.

House Committee on Financial Services Passes 13 Bills

On 13 December, the House Committee on Financial Services passed 13 bills, including:

  • H.R. 4519, a bill to amend the Securities Exchange Act of 1934 to repeal certain disclosure requirements related to resource extraction, was passed by a vote of 33-27. According to the accompanying release, the bill would “repeal[] Section 1504 of the Dodd-Frank Act, which requires resource extraction issuers to disclose payments made to governments for the commercial development of oil, natural gas, or minerals.”
  • H.R. 4537, the International Insurance Standards Act of 2017, passed by a vote of 56-4. According to the accompanying release, the bill would require that: (i) any international insurance standard agreement “entered into by entities representing the United States may not be agreed to unless it is consistent with existing federal and state law as well as recognizing existing Federal and State laws on the regulation of insurance”; (ii) “federal entities participating in negotiations must coordinate and consult with state insurance commissioners”; (iii) “Congress must be consulted on negotiations prior to negotiations taking place, as well as during and prior to entering into an agreement”; (iv) “authority is granted to Congress to conduct a ‘fast-tracked’ disapproval process”; and (v) “Congress has similar disapproval authority on covered agreements.”
  • H.R. 4545, the Financial Institutions Examination Fairness Reform Act, passed by a vote of 50-10. According to the accompanying release, the bill would, among other things, create an Office of Independent Exam Review within Federal Financial Institutions Examination Council” (“FFIEC”) and establish for regulated entities the right “to appeal a material supervisory determination” to that Office.
  • H.R.4546, the National Securities Exchange Regulatory Parity Act, passed by a vote of 46-14. According to the accompanying release, the bill would “amend[] Section 18 of the Securities Act of 1933 to eliminate references to specific national securities exchanges, specifically the New York Stock Exchange, American Stock Exchange, and NASDAQ, and instead provide blue sky exemption for securities qualified for trading in the national market system pursuant to section 11A(2) of the Securities Exchange Act of 1934.”

Economic Growth, Regulatory Relief, and Consumer Protection Act

On 5 December, the U.S. Senate Committee on Banking, Housing, and Urban Affairs passed, by a vote of 16-7, S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act. As explained by an accompanying section-by-section summary, the bill would “rais[e] the threshold for applying enhanced prudential standards [for certain banking holding companies (“BHCs”)] from $50 billion to $250 billion,” although the effective date of this change for BHCs with between $100 billion and $250 billion in assets would not take place for eighteen months after the bill’s passage, unless the Federal Reserve Board (“Fed”) agreed to put in place the exemption earlier, and the Fed would “have the authority to apply enhanced prudential standards” to BHCs with assets between $100 billion and $250 billion after the effective date. The bill would also: (i) require “the Treasury Department to submit a report to Congress on the risks of cyber threats to financial institutions and the U.S. capital markets”; and (ii) “require the SEC to report to Congress on the risks and benefits of algorithmic trading in the U.S. capital markets.”

Office of Financial Research Publishes 2017 Annual Report to Congress and 2017 Financial Stability Report

On 5 December, the Office of Financial Research (“OFR”) published its 2017 Annual Report to Congress and its 2017 Financial Stability Report, supplementing the Annual Report. Key findings of the 2017 Financial Stability Report, as summarized in the 2017 Annual Report to Congress, include: (i) U.S. financial stability risks “remain in a medium range, although market risks are elevated,” based on the OFR’s Financial System Vulnerabilities Monitor heat map; (ii) the OFR’s Financial Stress Index is “near its lows since the financial crisis”; and (iii) while there has been an increase in market resiliency since the financial crisis, new vulnerabilities have emerged, including “vulnerability to cybersecurity incidents,” “resolution risks at systemically important financial institutions,” and “evolving market structure.”

OIRA Publishes Current Regulatory Plan and the Unified Agenda of Regulatory and Deregulatory Actions

Recently in December, the Office of Information and Regulatory Affairs (“OIRA”) published its “Current Regulatory Plan and Unified Agenda of Regulatory and Deregulatory Actions.” According to the release, the Agenda includes the “withdrawal and reconsideration of numerous regulatory actions, as well as newly anticipated deregulatory actions that emerged from reviews already well underway.” With respect to the SEC, notable rulemakings that are slated for completion by October 2018 include: (i) the issuance of a proposed rule recommending that the “Commission repropose new rules and rule amendments to allow certain exchange-traded funds to operate without first obtaining exemptive orders from the Commission”; (ii) the issuance of a proposed rule “making recommendations . . . regarding standards of conduct for investment professionals”; and (iii) the issuance of a proposed rule recommending “certain amendments to the Commission's existing whistleblower rules.” With respect to the CFTC, notable rulemakings that are slated for completion this year include: (i) by April 2018, the issuance of a proposed rule regarding “position limits and position accountability for security futures products”; and (ii) by July 2018, the issuance of a final rule regarding “position limits for commodity derivatives contracts.” 


Financial Stability Oversight Council Holds Open and Executive Session

On 14 December, Treasury Secretary Steven Mnuchin convened a meeting of the Financial Stability Oversight Council (“FSOC”) in open and executive sessions. According to the meeting readout, during the open session, the participants: (i) “voted to approve its 2017 annual report”; and (ii) “heard a presentation from the CFTC on its Project KISS to simplify and modernize its rules.” During the executive session, the participants: (i) “discussed the recent report from Secretary Mnuchin to the President on the Council’s processes for designating nonbank financial companies and financial market utilities”; (ii) “discussed the pending litigation brought by MetLife challenging its designation by the Council in December 2014”; and (iii) heard a presentation from CFTC Chairman J. Christopher Giancarlo on newly-introduced Bitcoin futures contracts that included “his policy view and risk assessment of those instruments.” The Council also voted to approve the minutes of its previous meetings on 16 November 2017, which covered: (i) a discussion of the Council’s 2017 Annual Report; (ii) a “proposal that the government ask the court” in “the pending litigation brought by MetLife . . . to set a schedule for the parties to file briefs” regarding the Treasury’s report on FSOC’s designation process; and (iii) a discussion of staffing and operational issues related to the OFR.

Financial Stability Oversight Council Publishes 2017 Annual Report

On 14 December, the FSOC published its 2017 Annual Report. The report provides an overview of trends in U.S. financial markets since the Council’s 2016 report, as well as recent regulatory developments and 2017 Council activities. It details potential emerging threats to financial stability and financial system vulnerabilities identified by the Council, including: (i) ongoing structural vulnerabilities, including issues related to central counterparties (“CCPs”), short-term funding markets, reference rates, and “data quality, collection, and sharing”; (ii) cybersecurity; (iii) changes in market structure; and (iv) events in Europe and emerging markets. The report also provides the Council’s recommendations relating to: (i) cybersecurity; (ii) asset management products and activities; (iii) capital, liquidity, and resolution; (iv) central counterparties (“CCPs”); (v) reforms related to reference rates; (vi) data quality, collection, and sharing; (vii) managing vulnerabilities in an environment of low, but rising, interest rates; (viii) changes in financial market structure and implications for financial stability; (ix) financial innovation; and (x) regulatory efficiency and effectiveness. These recommendations include the following.

  • Cybersecurity: The report recommended: (i) “the creation of a private sector council of senior executives that would focus specifically on ways that cyber incidents could impact business operations and market functioning and liaise with principal-level government counterparts on cybersecurity issues”; and (ii) “Congress [should] pass legislation that grants examination and enforcement powers to the SEC [and] CFTC . . . to oversee third-party service providers.”
  • Asset Management Products and Activities: The report recommended: (i) the SEC should monitor the implementation of “a number of [finalized] rules designed to promote effective liquidity risk management, provide for enhanced data reporting, and permit the use of swing pricing under certain circumstances . . . to evaluate whether the chosen regulatory approach addresses potential risks effectively and efficiently”; (ii) the SEC should consider the “measures and approach” of a rule proposed in December 2015 on the use of derivatives by registered investment companies, “including whether the proposal addresses risk effectively and efficiently”; and (iii) agencies should “review their data collections and assess whether they are sufficient to allow the Council to monitor whether and how hedge funds may pose risks to financial stability.”
  • Capital, Liquidity, and Resolution: The report recommended: (i) financial regulators “ensure that the largest financial institutions have sufficient capital and liquidity to reduce their vulnerability to economic and financial shocks”; and (ii) regulatory agencies “continue to review resolution plans submitted by large financial institutions, provide guidance to such institutions, and ensure there is an effective mechanism for resolving large, complex institutions.”
  • CCPs: The report recommended: (i) the “CFTC, Federal Reserve, and SEC [should] coordinate in the supervision of all CCPs that are designated by the Council as systemically important FMUs”; (ii) “further development of supervisory stress tests and consideration of whether collaboration across regulators, both domestic and international, on future exercises would yield advantages”; and (iii) agencies should “focus on CCP recovery and resolution planning to further develop such plans for systemically important CCPs.”
  • Reference Rates: The report recommended: (i) the Alternative Reference Rates Committee “complete its work developing a credible implementation plan to achieve a smooth transition to the Secured Overnight Financing Rate . . . as its recommended alternative reference rate” to the London Interbank Offered Rate (“LIBOR”); and (ii) member agencies “work closely with market participants to identify and mitigate risks from potential dislocations during the transition process.”
  • Financial Market Structure and Financial Stability: The report recommended: (i) developing “assessment of . . . areas in which improved data-gathering might be fruitful . . . [particularly] where underlying sources of risks may have similar impacts across different products”; and (ii) member agencies should “continue to evaluate the use of coordinated tools such as trading halts across interdependent markets, particularly in periods of overall market stress, operational failure, or other incidents that might pose threats to financial stability, while being mindful of the tradeoffs such tools might entail.”
  • Regulatory Efficiency and Effectiveness: The report recommended that regulators “continue to evaluate regulatory overlap and duplication, modernize outdated regulations, and, where authority exists, tailor regulations based on the size and complexity of financial institutions.”


FINRA Publishes Report on Examination Findings

On 6 December, FINRA published a report containing “selected observations from recent examinations that FINRA considers worth highlighting due to their potential impact on investors and markets or the frequency with which they occur.” The report includes findings related to: (i) cybersecurity; (ii) outside business activities (“OBAs”) and private securities transactions (“PSTs”); (iii) best execution; and (iv) market access controls. Findings include:

  • Cybersecurity: Some firms do not (i) “address basic access management issues such as terminating departing employees’ access to firm systems on a timely basis”; (ii) “have formal processes to conduct ongoing risk assessments of their data, systems and applications, and could not effectively identify their critical assets and the potential risks to those assets”; or (iii) “have formal processes to review a prospective vendor’s cybersecurity preparedness or to ensure new vendors have appropriate protections in place.”
  • OBAs and PSTs: At some firms, (i) individuals fail “to notify their firms of proposed OBAs or PSTs, including situations where a new hire or current registered or associated person failed to notify their prospective or current firm in writing of an existing OBA or PST”; (ii) “written supervisory procedures for [OBA or PST] reviews or the procedures were inadequate”; and (iii) there are issues with the post-PST approval process, such as a firm not retaining “the documentation necessary to demonstrate their compliance with . . . supervisory obligations.”
  • Best Execution: FINRA reported numerous process deficiencies associated with some firms “fail[ing] to implement and conduct an adequate regular and rigorous review of the quality of the executions of their customers’ orders.”
  • Market Access: Some firms (i) fail “to establish reasonable pre-trade financial thresholds (capital and credit), or to undertake reasonable due diligence to substantiate those firm-assigned thresholds”; (ii) “did not adequately consider capital and credit usage in the aggregate”; and (iii) “did not appropriately tailor their erroneous or duplicative order controls to particular products, situations or order types.”

FINRA also provided additional observations related to: (i) “alternative investments held in individual retirement accounts”; (ii) “net capital and credit risk assessments”; (iii) order capacity; (iv) Regulation SHO; and (v) TRACE reporting.

Statement of SEC Chairman Jay Clayton on “Cryptocurrencies and Initial Coin Offerings”

On 11 December, SEC Chairman Jay Clayton issued a public statement on issues related to digital assets and so-called “initial coin offerings” (“ICOs”). In his statement, Chairman Clayton noted that ICOs “can be effective ways for entrepreneurs and others to raise funding.” He also warned retail investors that “cryptocurrency and ICO markets . . . [have] substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation” and highlighted certain considerations investors should take into account when deciding to invest in such markets. Chairman Clayton also urged market professionals to “read closely” the SEC’s July 2017 investigative report on the Decentralized Autonomous Organization digital asset, and to “review [the SEC’s] subsequent enforcement actions” to ensure that investors are appropriately protected this space.

Keynote Address of SEC’s Division of Investment Management Director Dalia Blass at the ICI Securities Law Developments Conference

On 7 December, Dalia Blass, director of the SEC’s Division of Investment Management, delivered the keynote address before the ICI Securities Law Developments Conference. In her address, Director Blass discussed two new initiatives launched by the Division: (i) the Investor Experience Initiative, aimed at reviewing whether information available to investors is “presented in a way that works best for investors” and whether such presentation of information can be improved; and (ii) the Board Outreach Initiative, aimed at examining whether “funds could benefit from recalibrating the ‘what’ and the ‘how’ of board responsibilities” such as where board focus would be most valuable. Director Blass also emphasized the importance of effective regulatory engagement, and urged market participants, when writing a comment letter to or attending a meeting with the SEC, to: (i) think about “involving traders, analysts, compliance officers, operations folks, fund managers and other professionals” in the discussions; and (ii) focus on “identify[ing] ways to address . . . issues while still achieving the Commission’s goal.”

SEC Modifies Form N-PORT Filling Requirements for Funds

On 8 December, the SEC issued a press release announcing modifications to Form N-PORT filing requirements, which require funds to publish detailed portfolio requirements to the SEC’s EDGAR system. In the release, the SEC explained that it has modified its approach “in recognition of the importance of sound data security practices and protocols for sensitive, non-public information.” Under the new approach, “larger fund groups will maintain the Form N-PORT information in their records and make it available to the Commission upon request in lieu of filing the form on EDGAR” for the first nine months after the Form N-PORT compliance date on 1 June 2018. Larger fund groups will begin the filing of Form N-PORT through EDGAR in April 2019; smaller fund groups will begin the filing in April 2020. The SEC also indicated that “to ensure that investors do not lose access to important information, the Commission is requiring funds to continue filing public reports on existing Form N‑Q until they begin filing reports on Form N-PORT using EDGAR.”

CFTC & Derivatives

CFTC Issues Proposed Interpretation on Virtual Currency “Actual Delivery” in Retail Transactions

On 15 December, the CFTC announced a Proposed Interpretation concerning the “actual delivery” of retail commodity transactions in “virtual currency” – a term defined by the CFTC in previous enforcement actions. According to the accompanying release, the Proposed Interpretation “establishes two primary factors necessary to demonstrate ‘actual delivery’ of retail commodity transactions in virtual currency”: (i) the customer’s ability to “take possession and control of the entire quantity of the commodity” or “use it freely in commerce . . . no later than 28 days from the date of the transaction”; and (ii) “the offeror and counterparty seller . . . not retaining any interest in or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.” The interpretation will be open for public comment for 90 days after it is published in the Federal Register.

CFTC Issues Interpretive Guidance Clarifying Commodity Trading Advisor Registration Requirements Resulting from the MiFID II Research Provisions

On 11 December, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued interpretive guidance “clarifying commodity trading advisor [(‘CTA’)] registration requirements resulting from the [MiFID II] research compensation provisions for investment managers.” The Commission determined that futures commission merchants (“FCMs”), swap dealers (“SDs”), and introducing brokers (“IBs”) would not be in “violation of section 4m(l) of the [Commodity Exchange] Act for failing to register as a CTA in connection with the provision of commodity trading advice for separate compensation so long as the providing of the commodity trading advice is ‘solely incidental’ to the conduct of its business as an FCM or SD, or ‘solely in connection with’ its business as an IB.” In determining whether the commodity trading advice is “solely incidental” to the FCM’s or SD’s conduct of its business, or “solely in connection with” the IB’s business, the Commission indicated that such determinations must be made by the FCMs, SDs or IBs themselves “based upon the particular facts and circumstances of the relationship between the parties.” The Commission clarified further that, “although direct payment for commodity trading advice may be one factor, receipt of separate compensation would not be dispositive on its own.”

CFTC Issues Order Exempting Certain EU Facilities from SEF Registration Requirements

On 8 December, the CFTC issued an order that exempts certain multilateral trading facilities (“MTFs”) and organised trading facilities (“OTFs”) authorized within the EU from CFTC swap execution facility (“SEF”) registration requirements. As explained in the order, the CFTC has determined that the “regulatory frameworks” for sixteen MTFs and OTFs, listed in Appendix A of the order, “that are authorized within the EU are subject to comparable, comprehensive supervision and regulation on a consolidated basis by the appropriate governmental authorities within their respective home countries . . . satisfy the statutory standard set forth in CEA section 5h(g) for granting an exemption from the SEF registration requirement.” The order will become effective on 3 January 2018.


Federal Reserve Announced Final Plan to Produce new Reference Rates

On 8 December, the Board of Governors of the Federal Reserve System (“Board”) announced its final plans regarding three new reference rates that will produced by the Federal Reserve Bank of New York (“FRBNY”), “based on overnight repurchase agreement (repo) transactions secured by Treasury securities.” The three rates were developed by the FRBNY in coordination with the Office of Financial Research and include: (i) the “Triparty General Collateral Rate”; (ii) the “Broad General Collateral Rate”; and (iii) the “Secured Overnight Financing Rate.” The final plans include the methodologies that would be used to calculate the rates and stated that the FRBNY “intends to begin publishing the three rates during the second quarter of 2018.”


  • 23 January 2018: CFTC Technology Advisory Committee public meeting to discuss: (i) “the scope, plan, and approach for the Committee’s efforts in 2018”; (ii) “topics and issues involving financial technology in CFTC regulated markets”; and (iii) “work streams and/or subcommittee groups that can help generate actionable recommendations to the Commission on select issues”.
  • 28 January 2018: comments on FINRA’s requests comment on the effectiveness and efficiency of its payments for market making rule are due.
Ianthe Zabel
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