US Regulatory Update
Financial CHOICE Act 2.0
On 19 April, House Financial Services Committee Chairman Hensarling (R-TX) released an updated version of the Financial CHOICE Act (first released in June 2016), a plan to overhaul U.S. financial markets regulation and repeal much of the Dodd-Frank Act. The so-called “Financial CHOICE Act 2.0” includes several notable new provisions, such as requiring “financial agencies” to: (i) prepare and file a written statement documenting the agency’s compliance with heightened regulatory analysis requirements established for rules with an impact of $100 million or more a year on state or local governments or the private sector, and to “develop an effective process” to enable these stakeholders to “provide meaningful and timely input” on rulemakings related to “significant Federal mandates”; and (ii) implement policies (a) to reduce duplication between federal and state agency enforcement actions, (b) to determine the appropriateness of joint investigations and enforcement actions, and (c) to “establish a lead agency” for joint investigations and actions. Other changes relative to the June 2016 version of the CHOICE Act include: (i) increasing the exemption threshold for offers and sales of securities as part of employee compensation agreements; (ii) increasing the exemption threshold for qualifying venture funds; (iii) establishing term limits for members of the SEC’s Investor Advisory Committee; (iv) requiring SEC pilot programs to be “codified or sunset” after five years, with an additional three year extension available if necessary; (v) prohibiting the SEC from compelling the production of source code or similar intellectual property from market participants without a subpoena; (vi) requiring the SEC Chair to establish an “advisory committee on the Commission’s enforcement policies and practices” that would offer recommended reforms within 1 year of its establishment, and (vii) prohibiting the SEC from requiring the use of a universal proxy ballot. A summary of key differences between CHOICE Act 2.0 and CHOICE Act 1.0 is profiled in a memorandum obtained by the Wall Street Journal. As the memo explains, the CHOICE Act 2.0 adds additional requirements to the annual SEC enforcement report required by the CHOICE Act 1.0, and requires that “if the DOL promulgates a fiduciary rule, it must be substantially similar to the SEC’s fiduciary rule.”
Reorganization of Governmental Functions
On 12 April, the Office of Management and Budget (OMB) Director Mulvaneysent a memorandum to the heads of executive branch departments and agencies outlining the OMB’s implementation of President Trump’s 13 March 2017Executive Order to “reorganize governmental functions and eliminate unnecessary agencies … , components of agencies, and agency programs.” The memorandum requires covered agencies to: (i) take “immediate actions to achieve near-term workforce reductions and cost savings, including planning for funding levels in the President's Fiscal Year (FY) 2018 Budget Blueprint”; (ii) develop a plan to “maximize employee performance”; and (iii) “submit an Agency Reform Plan to OMB in September 2017 as part of the agency’s FY 2019 Budget submission.” OMB encourages each agency to include in its agency reform plan an “analytical framework that looks at the alignment of agency activities with the mission and role of the agency and the performance of individual functions” and, among other things, to “explore options” to: (i) eliminate services, activities, and/or functions that are “not core to the agency’s primary mission or obsolete”; (ii) restructure and merge certain agency activities; (iii) improve agency “efficiency and effectiveness”; and (iv) improve workforce management and reduce workforce size/costs. The memorandum also notes that OMB will “formulate a comprehensive Government-wide Reform Plan for publication in the President's FY 2019 Budget, including both legislative proposals and administrative actions.”
President’s Strategic and Policy Forum
On 11 April, President Trump hosted a strategic and policy forum with 17 CEOs to discuss tax reform and issues regarding economic growth. President Trump stated the Administration plans to “eliminate wasteful regulations” and is “doing a major elimination” of Dodd-Frank Act rules. President Trump indicated that his Administration intends to keep certain Dodd-Frank Act regulations, but will be “getting rid of many.”
Possible Government Shutdown
Funding for the federal government expires on 28 April. Congress returns to session this week, giving members only a few days to pass legislation that prevents a government shutdown.
SIFIs & FINANCIAL STABILITY
Trump Signs Executive Actions on FSOC and Orderly Liquidation Authority
On 21 April, President Trump signed two Presidential memoranda on financial regulation.
o The first memorandum directs the Treasury Secretary Mnuchin to review the Dodd-Frank Act’s Orderly Liquidation Authority (“OLA”), which serves as an alternative to liquidation or reorganization under the Bankruptcy Code and grants the FDIC broad discretion to take over and wind-down failing financial firms. Secretary Mnuchin must conduct this review within 180 days to determine whether OLA is in line with the “core principles” set forth in the President’s Executive Order on financial regulation released in February. Treasury’s review must also determine the potential cost of invoking OLA, adverse market impacts of OLA authority, and possible changes, including establishing a new chapter in the Bankruptcy Code.
o The second memorandum directs Secretary Mnuchin to assess whether the activities of the Financial Stability Oversight Council (“FSOC”) related to its authority to designate large non-bank financial institutions as systemically important are consistent with the President’s February Executive Order on financial regulation “core principles.” The memorandum also directs the Treasury Secretary not to designate any new non-bank SIFIs pending the completion of the review. The review must be conducted within 180 days and is required to assess whether the FSOC’s designation process (i) adequately respects due process; (ii) is sufficiently transparent; (iii) gives market participants the expectation that the government will shield SIFIs from bankruptcy; (iv) addresses the likelihood of a company’s “material financial distress”; (v) includes specific, quantifiable projections of the damage that could be caused to the U.S. economy by a company’s material financial distress; (vi) considers the cost of designation to the company; (vii) provides companies with a meaningful opportunity to have their designations reevaluated in a timely and transparent manner; and (viii) informs companies on how to reduce their perceived risk to U.S. financial stability so as to avoid designation. The memorandum directs Treasury to give recommendations to improve the designation process.
Fed Policy Paper: “A CCP is a CCP is a CCP”
On 14 April, the Federal Reserve Bank of Chicago published a staff policy paper(dated 5 April 2017) highlighting the major business model and risk profile differences between CCPs and banks. The paper emphasizes that CCPs, unlike banks, function as “commitment mechanisms” that are not in the “business of risk-taking” because their obligations are to retain a “matched book.” They act, therefore, as managers of risk rather than takers of risk. The paper asserts that central clearing transforms risk instead of eliminating it, and that the role of the CCP is to: (i) manage related credit, liquidity, and operational risks; (ii) provide mechanisms for “market entry and exit that supports liquidity”; and (iii) ensure that clearing members meet all CCP-mandated obligations. The paper recommends that regulators consider promulgating rules regarding CCP supervision and risk management that require a combination of initial margin collateral and mutualized resources from clearing members, rather than capital, to act as the primary support for a CCP’s loss absorption capacity. The paper also provides the following policy observations: (i) capital analysis is not a meaningful measurement of CCP resilience, (ii) stress testing should focus on member default, and (iii) CCPs have unique default management and recovery tools that are not available to banks.
FSOC Insurance Rep Seeks Longer Term
On 20 April, Politico reported that S. Roy Woodall, Jr., the independent insurance sector representative on the FSOC, is endorsing legislation that would enable him to continue serving on the Council after his six-year term expires in September. If he is not replaced when his term expires, then the Council would lose its sole insurance representative and one of its 10 voting members.
CFTC & DERIVATIVES
On 13 April, the Wall Street Journal reported the Trump administration was considering re-nominating Brian Quintenz to serve as a CFTC Commissioner. President Trump withdrew Quintenz’s nomination on 28 February 2017.
Letter to Acting Labor Secretary
On 17 April, Republicans from the House Education and Workforce Committee sent a letter to Acting Department of Labor (“DOL”) Secretary Ed Hugler urging him to delay the applicability of the fiduciary duty rule until the conclusion of the analysis directed by the President in his February memorandum on the rule. The letter states that the fiduciary rule (i) is “likely to harm investors by reducing access to retirement savings offerings and financial advice,” (ii) “will disrupt the retirement services industry in a way that adversely affects investors,” and (iii) “will lead to increased litigation and prices for retirement services.
DOL “Safe Harbor” Rule
On 17 April, President Trump signed a joint Congressional resolution disapproving the DOL’s December 2016 “Safe Harbor” rule for municipal government-run IRAs (H.J. Res. 67), thus nullifying the regulation. The DOL’s rule had changed the Employee Retirement Income Security Act of 1975 (“ERISA”) to enable the creation of municipal government-managed retirement plans for private sector employees working in a particular municipality. The DOL’s rule exempted retirement plans administered by municipalities from ERISA regulations – including those related survivor, spousal, and children’s benefits, as well as inter-state portability – as long as certain requirements were met. Private plans, however, would continue to be subject to these and other ERISA rules. The President nullified the rule pursuant to his authority under the Congressional Review Act, which allows the House and Senate to pass a joint resolution of disapproval of any final administrative rule after the administrative agency has reported the final rule to Congress within 60 days of its promulgation; after the joint resolution clears both Houses, the President may nullify the rule by signature.
UPCOMING EVENTS AND DEADLINES
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”