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US Regulatory Updates

US Regulatory Update



On 4 April, the House of Representatives passed, by a vote of 331 to 87, H.R. 1343, the Encouraging Employee Ownership Act, a legislative proposal introduced by Rep. Randy Hultgren (R-IL). The bill would amend an SEC rule to increase, from $5 to $10 million, the amount of stock awards a company can grant to its employees before being required to make certain disclosures to its shareholders, such as producing financial statements.

On 6 April, the House of Representatives passed, by a vote of 417 to 3, H.R. 1219, the Supporting America’s Innovators Act, a legislative proposal introduced by Rep. Patrick McHenry (R-NC). The bill would amend the definition of an “investment company” under the Investment Company Act to exempt venture capital funds with fewer than 250 investors and less than $10 million in aggregate capital contributions and uncalled committed capital.

On 30 March, Sen. Jack Reed (D-RI) introduced S. 779, the Stronger Enforcement of Civil Penalties Act. Among other things, the bill would update and strengthen the SEC’s authority to impose civil penalties by: (i) increasing the SEC’s statutory limits on civil monetary penalties; (ii) directly linking the size of the penalties to the scope of harm and associated investor losses; and (iii) substantially raising the penalties for repeat violators.

On 3 April, House Financial Services Committee Vice Chairman Rep. Patrick McHenry (R-NC) reportedly stated that it is unlikely for the House of Representatives to vote on changes to the Dodd-Frank Act until “perhaps June, [or] July.” McHenry indicated that “the whole year is shifted because we have taken longer on health care,” and he expects financial reforms to follow health care and tax reforms.


Federal Financial Regulatory System and Opportunities for Reform

On 6 April, the House Financial Services Financial Institutions and Consumer Credit Subcommittee held a hearing on the examination of the federal financial regulatory system and opportunities for reform. Subcommittee Chairman Leutkemeyer (R-MO) stated that financial companies are “standing in regulatory quicksand” full of “ambiguous guidance” and “contradicting rules” that has led to confusion in trying to comply with the Dodd-Frank Act. He also stated that customers are left “clamoring” for access to financial services and paying more for the services they do have. Rep. David Scott (D-GA) stressed the need for “striking the right balance” between consumer protection and regulatory burden. He criticized the Financial CHOICE Act for “throwing out” the Dodd-Frank Act.

o   Heritage Foundation Senior Research Fellow Michel testified that there are “countless” ways to reform the federal financial regulatory system, as it is full of counterproductive and overlapping authorities. When questioned by Rep. David Scott about whether merging the SEC and CFTC would cause confusion to the financial system, he replied that it would not cause any additional confusion than there already is, and that an artificial distinction was made in the Dodd-Frank Act regarding financial instruments. When questioned by Rep. Andy Barr (R-KY) about whether the Federal Reserve should participate in the FSOC, he replied that it should not. He also did not think the Federal Reserve should take part in financial regulation. When questioned by Rep. Barr about whether multiple regulators can lead to greater accountability, he replied that there is “little support” for the “race to the bottom” approach.

o   Department of Treasury Former Acting Assistant Secretary for Financial Institutions Gerety testified that post-crisis Wall Street reforms have supported the financial system and its recovery, have added millions of new jobs and increased household wealth, and have maintained steady real gross domestic product. He stated that the financial system only works with clear rules and safeguards and that the Dodd-Frank Act uses clear exemptions, statutory requirements, and market-based rules to regulate the market. When questioned by Ranking Member William Lacy Clay (D-MO) about the Presidential Executive Order directing the Department of Treasury to consult with the FSOC to produce a report on whether the current financial regulatory system meets several core principles, he replied that the Department already conducts consistent reviews, and that the question is how to articulate the regulations or guidance in ways that are appropriate to the risk, as well as how to build on the progress already made in the financial system. When questioned by Rep. Carolyn Maloney (D-NY) about the ability to “wind down” large financial institutions, including nonbank institutions, through the orderly liquidation authority (OLA) in Dodd-Frank, he replied that the OLA did not exist during the financial crisis and that choices were limited, causing a “massive problem” for the American people.

o   American Financial Services Association Executive Vice President Himpler testified that while federal regulators have a long history of supervising banks, trying to supervise finance companies as if they are the same as banks “can be disastrous.”


Arbitrary and Inconsistent Non-Bank SIFI Designation Process

On 28 March, the House Financial Services Oversight and Investigations Subcommittee held a hearing on the FSOC’s process for designating nonbank SIFIs. Several panelists referenced the 28 February 2017 House Financial Service Committee staff report and its conclusion that the nonbank SIFI designation process is “arbitrary and inconsistent,” with a lack of transparency throughout the process. Several Congress members and panelists stressed the need for a clear de-designation process and noted that the Financial CHOICE Act, a legislative proposal that House Financial Service Committee Chairman Hensarling intends to re-introduce, would eliminate the FSOC’s ability to designate SIFIs and would create a framework of regulation that does not rely on taxpayer bailouts.

o   American Action Forum President Holtz-Eakin criticized the FSOC and testified that: (i) the FSOC’s designation process prioritized an institution-based designation process over an activities-based designation process in a fundamentally flawed manner; (ii) the designation of a nonbank financial institution as a SIFI has negative consequences for both the institution and its customers; and (iii) the only nonbank SIFIs that have been designated thus far are insurance companies, which should not be regulated by the FSOC because they are regulated by the states.

o   American Enterprise Institute Resident Scholar Kupiec testified that the Committee staff report shows that the FSOC has no known methodology or uniform process for designation, and that each designation lacks standardization.

o   R Street Institute Distinguished Senior Fellow Pollock testified that: (i) the Committee staff report shows the lack of fairness in the FSOC designation process; (ii) in referencing conversations he had with a senior FSOC staff member, the FSOC meetings never “produced a new insight in financial issues”; and (iii) the underlying issue of the FSOC is its structure, which allows it to act “as a little legislature.”

o   University of Pennsylvania Associate Professor Zaring defended the FSOC and testified that: (i) the Committee staff report subjects the FSOC to an “after-the-fact” review inconsistent with the flexibility the Council was given under the Dodd-Frank Act; (ii) there was “nothing arbitrary” about the FSOC’s emphasis of some factors more than others as part of its designation process; (iii) the Committee staff report attempts to isolate and criticize particular aspects of the Council’s analysis, even though the designation decision is meant to be “a holistic one”; and (iv) the FSOC was given the responsibility of taking a broad view of the safety of the financial system, and should be given flexibility to adjust assessments in the future.

o   In light of the Committee staff report, several Republican Senators sent a letter to Treasury Secretary Mnuchin urging him to review the FSOC’s nonbank SIFI designation process. The lawmakers stated that the FSOC’s designation process “lacks transparency and accountability, insufficiently tracks data, and does not have a consistent methodology for determination,” and that Mnuchin has their support to use “all the tools available as Secretary of Treasury” to end “too-big-to-fail.”

FSOC Designation of SIFIs

On 29 March, House Financial Services Financial Institutions and Consumer Credit Subcommittee Chairman Blaine Luetkemeyer (R-MO) sent a letter to House Appropriations Financial Services and General Government Subcommittee Chairman Tom Graves (R-GA) and Ranking Member Mike Quigley (D-IL) requesting that the Subcommittee include in its FY 2018 appropriations package measures that would, among other things, “end or, at minimum alter, the ability of the [FSOC] to designate both bank and nonbank institutions” as SIFIs. Luetkemeyer stated that the “process for designation and de-designation of nonbanks appears to be shrouded in mystery” and that “[w]e should no longer let the SIFI process lead to marketplace disruption or penalize companies through opaque processes based on arbitrary figures.”


Covered Agreement

On 7 April, House Financial Services Housing and Insurance Subcommittee Chairman Sean Duffy (R-WI) and Rep. Denny Heck (D-WA) published a discussion draft of the International Insurance Standards Act of 2017, a legislative proposal intended to preserve the U.S. state-based system of insurance regulation and to provide oversight and transparency for the international standards setting processes. Among other things, the bill would: (i) ensure that “State insurance regulators are included throughout the negotiations of Covered Agreements and international insurance agreements”; (ii) require U.S. negotiating parties to consult with Congress on international insurance negotiations and agreements; (iii) prohibit covered agreements from including new prudential requirements for U.S. insurers; and (iv) define international insurance agreements and covered agreements as rules for the purposes of the Congressional Review Act.

On 7 April, Reps. Ed Royce, Darrell Issa, and Mimi Walters (R-CA) sent a letter to Treasury Secretary Mnuchin expressing their “strong support” for the covered agreement between the U.S. and EU, and urging him to “certify the covered agreement without delay.”


 SEC Chair Nominee

On 4 April, the Senate Banking Committee voted, 15 to 8, to approve Jay Clayton as the next SEC Chairman. The nomination will now go to the Senate floor for a final vote, which is expected is occur in late April. The Senate Banking Committee vote follows the Committee’s 23 March 2017 hearing on Mr. Clayton’s nomination, at which Mr. Clayton pledged to make the U.S. capital markets more competitive, root out bad actors, and “show no favoritism” if appointed to the position. He also indicated that he was “100 percent committed” to combating fraud and “shady practices” in the financial system, and emphasized the need to give the public the opportunity to fairly participate in the U.S. capital markets. With respect to the Dodd-Frank Act, he stated that he has no plans to “attack the legislation” or dismantle regulations implemented under the statute, noting, however, that the Trump Administration will examine whether the Dodd-Frank Act is stifling economic growth, especially regarding whether its rules “are achieving their objectives effectively.” With respect to equity market structure, he indicated that the Commission should continue its review of equity market structure through the Equity Market Structure Advisory Committee. Regarding corporate disclosures, he indicated that the touchstone to mandating disclosure is “materiality,” and that he will consider a federal mandate to require political spending disclosure. The lawmakers did not question Mr. Clayton regarding issues affecting financial advisers, including the DOL’s fiduciary duty rule.

Criticism of Actions of SEC Acting Chairman

On 29 March, four Senate Banking Committee Democrats sent a letter to SEC Inspector General Hoecker urging him to conduct an investigation of SEC Acting Chairman Piwowar’s recent decisions to: (i) direct the SEC staff to review the conflict minerals rule guidance; (ii) solicit public comment on the pay ratio disclosure rule; and (iii) limit the authority of the Enforcement Division staff to initiate subpoenas. The Senators raised concerns that these “actions may lack adequate justification, undermine the SEC’s mission, exceed his authority as Acting Chairman, violate other procedural requirements, and could potentially prove to be a waste of the SEC staff’s precious time and resources.” Arguing that there is “no evidence that any of these changes in the SEC’s course are desired, or have been sought, by the person nominated to be the next SEC Chair,” the Senators requested that the Inspector General’s office investigate whether Acting Chairman Piwowar’s actions are “legally permissible and in keeping with the SEC’s core mission.”

On 21 March, Rep. Tammy Baldwin (D-WI) sent a letter to SEC Acting Chairman Piwowar criticizing Piwowar’s decision to open a new comment period on the implementation of the pay ratio disclosure rule. Rep. Baldwin expressed her concern that Acting Chairman Piwowar was seeking “one-sided comments from issuers more than 18 months since this rule was adopted.” Rep. Baldwin also attached an article to the letter recommending an alternative way to calculate the “estimated fair value” of stock-based executive pay.

o   Reps. Chris Van Hollen (D-MD), Jack Reed (D-RI), Elizabeth Warren (D-MA), Cory Booker (D-NJ), Richard Durbin (D-IL), Jeff Merkley (D-OR), Al Franken (D-MN) and Bernie Sanders (I-VT) also sent a letter to Acting Chairman Piwowar expressing their concern about the new comment period for the pay ratio disclosure rule. The lawmakers stated that they were “extremely troubled by [Piwowar’s] decision to open a new comment period on the final rule adopted 18 months ago” and questioned why he had “inexplicitly halted this important investor tool.”

o   More than 100 unions, pension funds, activist investors, state treasurers, and consumer advocacy groups sent a letter to Acting Chairman Piwowar urging him not to delay the implementation of the pay ratio disclosure rule. The organizations argued that the rule is “thoughtful, balanced, and carefully crafted to provide companies considerable flexibility . . . while giving shareholders valuable new information with which to assess companies in their investment portfolios.” The organizations also noted that “[a]ny further delay will impose significant costs on investors who have been anticipating pay ratio disclosure.”

Equity Market Structure

On 5 April, the SEC’s Equity Market Structure Advisory Committee held a meeting to discuss, among other things: (i) the potential elimination of Rules 611 and 610 of Regulation NMS; (ii) the centralization of self-regulatory organizations; (iii) the implications of the limit up/limit down construct; (iv) the tick size pilot; and (v) the Closing Auction Process.

o    Rules 611 and 610: The participants considered whether to eliminate Rule 611 (the Order Protection Rule) and Rule 610 (which prohibits locked and crossed markets), to reduce complexity and increase competition and innovation in the markets. The participants discussed potentially launching a pilot to repeal Rules 611 and 610, although they did not have a timeline for making a recommendation for the proposal.

o    Tick Size Pilot: The Market Quality Subcommittee presented a report to the Committee which indicated, among other things, that there have been very limited improvements in trade size and overall volume in the stocks of the tick size pilot, the cost of execution for market participants and volatility of the names in the pilot have increased, and the Commission should perform an interim review of the progress of the pilot to determine if the pilot should be changed or eliminated in light of its impacts to customer activity.

On 23 March, SEC Acting Chairman Piwowar delivered a speech supporting a “special study of the securities markets” to be conducted by Columbia University. Columbia University indicated that the study will be conducted in three phases, which include: (i) a commission of major papers to provide a roadmap for the implementation of the study; (ii) a plan of action for completion of the study; and (iii) the implementation of the study, including a comprehensive final report directed at federal financial regulators and Congress. The report is expected to be completed in December 2020. Acting Chairman Piwowar urged those who will be conducting the study: (i) to approach it with open minds; (ii) to “avoid anchoring themselves to the status quo or prior proposals”; (iii) to ensure that the study remains “flexible in scope”; and (iv) not to shy away from discussing “specific policy recommendations.”

On 22 March, the SEC adopted an amendment to shorten the standard settlement cycle for most broker-dealer securities transactions by one business day. The amended rule shortens the settlement cycle from three (T+3) to two (T+2) business days. Broker-dealers are required to comply with the new settlement cycle beginning on 5 September 2017.


Swap Trade Confirmations

On 24 March, the CFTC’s Division of Market Oversight issued no-action relief associated with swap trade confirmation requirements for swap execution facilities (SEFs). Subject to certain conditions, the no-action relief exempts SEFs from the following requirements: (i) obtaining documents that are incorporated by reference in a trade confirmation issued by a SEF, prior to issuing the confirmation; (ii) maintaining such documents as records; and (iii) reporting certain confirmation data when such confirmation data is contained solely in the terms of the underlying agreements that are incorporated by reference. The relief will expire on the effective date of any changes in the regulation.


Acting Chairman Giancarlo Speech

On 30 March, CFTC Acting Chairman Giancarlo delivered a speech providing additional details on his “new agenda” for the Commission.

o   Review of Regulations: Giancarlo indicated that the Commission will soon request public comment on the recently launched Project “Keep It Simple Stupid (KISS).” He reiterated, however, that the project is “not about identifying rules for repeal or even rewrite” but rather identifying less burdensome ways of applying existing rules.

o   Swaps Regulatory Framework: Arguing that the Commission’s existing swap rules have “fragmented global markets into a series of distinct liquidity pools that are less resilient to market shocks and less supportive of global economic growth,” he urged the Commission to pursue a “better regulatory framework for swaps trading,” which he said must “facilitate risk transfer in support of increased commercial lending and American economic revival.”

o   International Presence: Giancarlo indicated that he expects the Commission to “fully embrace” President Trump’s 3 February 2017 Executive Order promoting the advancement of American interests in international negotiations. He stressed that the Commission must “use [its] strong influence in global standard-setting bodies to ensure that capital rules set by international bodies do not hinder strong economic growth” of the U.S.

Commissioner Bowen Speech

On 5 April, CFTC Commissioner Bowen delivered a speech on the harmonization of global regulation of financial markets. She expressed her concern that international regulatory barriers continue to hamstring the Commission’s ability to regulate derivatives market by restricting its access to data regarding global derivatives markets. To resolve this issue, she urged global regulators to: (i) remove the regulatory barriers to data sharing across jurisdictions for the “prevention of another crisis”: (ii) globally share information about “potential bad actors” moving between markets; and (iii) address the “unfortunate outcome” of applying bank-like capital requirements to segregated funds used to secure cleared products that “reduc[e] the appeal and viability of clearing.”


On 4 April, the DOL released a final rule delaying the applicability date of its fiduciary duty rule, along with the Best Interest Contract Exemption and the Principal Transactions Exemption, from 10 April 2017 to 9 June 2017. The delay only applies to the Impartial Conduct standards of the rule. Other parts of the rule, such as the written disclosure requirements, become applicable on 1 January 2018. The DOL issued the delay in order to review the rule as mandated by President Trump’s 3 February 2017 memorandum to determine whether the rule may adversely affect the ability of Americans to gain access to retirement information and financial advice. The DOL is expected to further delay the rule as it conducts its review.

On 6 April, the Fifth Circuit Court of Appeals denied an emergency injunction and a request to expedite an appeal filed by nine financial industry groups in their lawsuit against the DOL’s fiduciary duty rule. The industry groups argued that the fiduciary rule is “contrary to law” and that a 60-day delay is not enough to protect the financial industry from disruptions that the rule would cause. The court did not provide a substantive opinion.

On 20 March, Chief District Court Judge Barbara Lynn denied an emergency injunction filed by nine financial industry trade groups to postpone the applicability date of the fiduciary duty rule. Judge Lynn highlighted the fact that even if most of the challenged aspects of the fiduciary duty rule, such as the Best Interest Contract Exemption, became effective on 10 April 2017, the final compliance deadlines were not until 2018. Judge Lynn also indicated that the emergency injunction was unnecessary in light of the DOL’s decision to delay the implementation of the rule by 60 days.

On 5 April, the Senate Banking, Housing, and Urban Affairs Economic Policy Subcommittee held a hearing on the current state of retirement security in the U.S. The participants discussed issues relating to financial literacy and the potential impact of the DOL’s fiduciary duty rule.

o   Bipartisan Policy Center Senior Fellow Conrad testified that millions of Americans cross-generationally are not prepared for retirement, attributing this to six challenges associated with retirement security in the U.S.: (i) few workers participate in workplace plans; (ii) incurring taxes and penalties through the early withdrawal of retirement savings to pay for unexpected expenses; (iii) longevity and the risk of outliving savings; (iv) under-utilization of home equity for retirement; (v) lack of financial literacy in America; and (vi) shortfalls in Social Security. When questioned by Subcommittee Chairman Tom Cotton (R-AR) about the need for retirement system reform, he said that the problems with the current system can be attributed to a lack of access and contributions to employer-sponsored retirement plans.

o   Hudson Institute Distinguished Fellow Mead testified that the U.S.’s retirement system, consisting of social security, employer-provided retirement plans, and private savings and investments, “is failing Americans.” When questioned by Sen. Thom Tillis (R-NC) about the importance of financial literacy, he replied that states must ensure curriculums that include financial literacy. When questioned by Sen. Tillis about whether the DOL’s fiduciary duty rule aids or hurts individuals who have a limited capacity to contribute to plans, he replied that one of the challenges with the current system is that individuals have scattered accounts, low balances, and that the cost of the fiduciary rule would make it difficult to utilize and grow those accounts. He further explained that the current system was not created in anticipation of evolving jobs and markets.


Treasury Secretary Concerns Regarding Cybersecurity

On 24 March, Treasury Secretary Mnuchin was reported to have identified cybersecurity as a primary concern. Mnuchin stated that ensuring a “safe and sound financial sector” requires cooperation and investment among various financial regulators, and he urged regulatory agencies to focus on incorporating cybersecurity into all oversight responsibilities.


o    10 April: comments due on NIST draft update of cybersecurity framework.

o    25 April: CFTC Market Advisory Committee meeting.

o    16 May: comments due on CFTC proposal on capital requirements of swap dealers and major swap participants (extended from 16 March).


o    25 April: CFTC Market Advisory Committee meeting

o    26 April: House Financial Services Committee hearing on the Financial CHOICE Act

o    11 May: comments due on FSB’s “Proposed Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms”

o    16 May: comments due on CFTC proposal on capital requirements of swap dealers and major swap participants (extended from 16 March)

Ianthe Zabel
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