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US Regulatory Update


Financial CHOICE Act Markup

On 4 May, the House Financial Services Committee passed, by a vote of 34-26,H.R.10, the Financial CHOICE Act of 2017, a legislative proposal introduced by Committee Chairman Hensarling (R-TX) aimed at restructuring the post-crisis regulatory framework. Committee Democrats were unsuccessful in passing any amendments offered during a markup that lasted three days.

Notable CHOICE Act provisions include: (i) repeal of the Department of Labor’s (“DOL”) fiduciary duty rule; (ii) reform of the Federal Reserve System’s governance structure and operations; (iii) repeal of the Orderly Liquidation Authority, which authorizes the FDIC to resolve failing bank holding companies or non-bank financial firms; (iv) repeal of the authority of the Financial Stability Oversight Council (“FSOC”) to designate non-bank firms as systemically important financial institutions (“SIFIs”); (v) creation of a new chapter in the Bankruptcy code to enable the wind-down of failing large financial firms; (vi) elimination of the Federal Insurance Office and the independent insurance member on the FSOC; (vii) creation of an Office of the Independent Insurance Advocate as a bureau within the Treasury Department; and (viii) placement of the Independent Insurance Advocate as a voting member on the FSOC.

Financial CHOICE Act Hearing

On 26 April, the House Financial Services Committee held a hearing to discuss the Financial CHOICE Act. Committee Member Rep. Sherman (D-CA) stressed that the full bill does not have bipartisan support and requested that Hensarling separate the bill into several parts to be voted on. When questioned by Rep. Poliquin (R-ME) on whether the FSOC should be allowed to designate asset managers as SIFIs, several panelists argued that that the FSOC should not have the authority to make such designations and that asset managers are not systemically important. Rep. Ross (R-FL) expressed his support for a provision that would repeal the DOL fiduciary duty rule.

o    AEI Senior Fellow Peter Wallison testified that the Dodd-Frank resulted in “unnecessary restrictions” to the market, including: (i) establishing the FSOC and giving it the authority to designate firms as SIFIs; and (ii) giving the Federal Reserve System the authority to support distressed clearinghouses. He criticized the FSOC’s composition for having a large number of bank regulators relative to other financial regulators. When questioned by Rep. Ross (R-FL) as to why the FSOC has authority to regulate insurance companies beyond the existing system of state insurance regulation, Wallison replied that there is no reason for the FSOC to have such authority and that the current system had been working well for a long time. Wallison also criticized the FSOC for “rubber stamping” decisions made by the Financial Stability Board. University of Michigan Law School Professor Michael Barr testifiedthat that the bill contains three “serious flaws”: (i) weakening financial system oversight; (ii) eliminating Orderly Liquidation Authority; and (iii) “undermining customer and investor protections.” He also criticized the bill for: (i) eliminating the ability of federal agencies to supervise non-bank SIFIs; (ii) abolishing the Office of Financial Research (“OFR”); and (iii) retracting oversight of “shadow banks.”

o    The R Street Institute Distinguished Senior Fellow Alex Pollock testifiedthat the bill would force all financial regulatory agencies to fall under the congressional appropriations process, ensuring that they are accountable to Congress. When questioned by Rep. Wagner (R-MO) about the FSOC’s designation process, Pollock replied that the designation process is inconsistent, political, judgmental, and that the bill would address these issues. Pollock agreed with Wallison that the FSOC should not have designation authority. Pollock also argued that provisions to require cost-benefit analyses on new regulations were an important part of the bill.

On 27 April,Treasury Secretary Steven Mnuchin released a statement supporting Hensarling’s introduction of the Financial CHOICE Act. He noted that the Department of Treasury is “focused on delivering regulatory relief that encourages banks to provide the capital and liquidity needed to create jobs and opportunities for growth, and that provides protection against taxpayer-funded bailouts.” 

On 28 April, House Financial Services Committee Democrats held a separatehearing on the Financial CHOICE Act. Ranking Member Waters strongly criticized the bill, stating that it “destroys Wall Street reform, guts the Consumer Financial Protection Bureau, and returns us to the financial system that allowed risky and predatory Wall Street practices and products to crash our economy.”

On 3 May, House Oversight and Government Reform Committee Ranking Member Elijah Cummings (D-MD) sent a letter to Committee Chairman Jason Chaffetz (R-UT) urging the Committee not to waive its jurisdiction over the Financial CHOICE Act. Ranking Member Cummings argued that the bill includes “numerous provisions that clearly fall within the legislative jurisdiction of the Committee…that would destroy key financial regulations and consumer protections” and stated that it is “imperative that the Committee review and vote on these dangerous proposals.”

Consolidated Appropriations Act of 2017

On 1 May, the Senate passed, by a vote of 79-18, H.R. 244, the Consolidated Appropriations Act of 2017, to provide the government with funding until the end of September 2017. Among other things, the Act would: (i) provide the SEC with $1.605 billion and the CFTC with $250 million in funding for FY 2017, maintaining the same level of funding as in FY 2016; and (ii) continue to prohibit the SEC from undertaking rulemaking that would require companies to disclose their political contributions in filings with the SEC.

Senate Confirmation of DOL Secretary

On 27 April, the Senate confirmed, by a vote of 60-38, the nomination of Alexander Acosta to be Secretary of Labor. Following the confirmation, nine Senate Health, Education, Labor, and Pensions Committee Republicans sent a letter urging Labor Secretary Acosta to “conduct and finalize an exhaustive review of the final fiduciary rule before any part of the rule becomes applicable,” raising concerns that the rule will “hurt working and middle-income savers’ access to basic investment education and assistance.” In addition, more than 100 Republican Congressmen sent a letter urging Labor Secretary Acosta to delay the fiduciary duty rule “in its entirety.” They argued that the 60-day delay “contravenes the presidential memorandum which directed a new economic analysis of the rule,” and requested that Labor Secretary Acosta “act expeditiously to reverse this significantly flawed rule” as it will have “significant consequences for [their] constituents.”


MetLife SIFI Designation

On 24 April, MetLife Inc. filed a motion to suspend the FSOC’s appeal of MetLife’slawsuit over its SIFI designation. MetLife requested the suspension in light of President Trump’s 21 April 2017 Memorandum directing Treasury Secretary Mnuchin to assess and report whether the activities of the FSOC related to its authority to designate non-bank financial institutions as SIFIs are consistent with the President’s February Executive Order on financial regulation “core principles.” MetLife argued that the temporary suspension will “enable the new Administration to determine whether any of FSOC’s positions in this case should be reconsidered and whether it is appropriate for the government to continue pressing this appeal.” Treasury Secretary Mnunchin’s review of FSOC designation powers is scheduled to conclude by 18 October 2017.

o    On 4 May, Department of Justice (“DOJ”) lawyers, on behalf of the FSOC, agreed to a 60-day delay of its appeal to the lower court’s March 2016 ruling that rescinded MetLife’s SIFI designation. The response filed by DOJ lawyers stated: “We do not take a position at this time on MetLife's motion to hold the case in abeyance until [Treasury Secretary Mnuchin’s] report is issued.” They also noted that a 60-day delay will give the DOJ and the FSOC members, including Jay Clayton as the newly appointed SEC Chairman, “additional time for deliberation.”


U.S.-EU Covered Agreement Senate Hearing

On 2 May, the Senate Banking, Housing, and Urban Affairs Committee held ahearing examining the U.S.-EU covered agreement. Senators remain divided on whether the covered agreement is beneficial to the U.S. or detrimental to the U.S. state-based insurance system. Committee Ranking Member Sherrod Brown (D-OH) generally indicated support for the U.S. state-based insurance system and the covered agreement, but voiced concerns over efforts “to hamstring or eliminate the Federal Insurance Office,” which he believed has the requisite insurance expertise to negotiate such agreements, and efforts to “include financial regulations in future free trade agreements.”

o    Transatlantic Reinsurance Company President and CEO Mike Sapnar testified that the covered agreement would “provide immediate benefits to the U.S. (re)insurance sector,” such as formal acceptance of the U.S insurance system by the EU, and that existing challenges to the agreement should not delay the signing of the agreement.

o    Former FIO Director Michael McRaith testified that the covered agreement would give U.S. reinsurers access to the entire EU market, that the agreement remains cross-conditional so that each party must first provide a benefit in order to receive a benefit, and that it would bring “finality” to the divide that has developed between the two insurance systems.

o    National Association of Mutual Insurance Companies President and CEO Stuart Henderson testified that the covered agreement does not favor U.S. insurance companies, especially those that do not have operations in the EU. He also expressed his concern over the use of international agreements to challenge or modify the U.S. state-based insurance system without proper due process and consultation with the state authorities, and he urged the Trump Administration to find a “real solution” to this issue.

National Flood Insurance Program

On 26 April, Senators Bill Cassidy (R-LA) and Kirsten Gillibrand (D-NY) released adraft bill, the Flood Insurance Affordability & Sustainability Act of 2017, to reauthorize the National Flood Insurance Program (“NFIP”) for 10 years. The NFIP is currently set expire on 30 September 2017. The bill, among other things: (i) would require the Federal Emergency Management Agency (“FEMA”) to make yearly purchases of backup coverage from the private sector; (ii) would double NFIP policyholder coverage limits from $250,000 to $500,000 for residential structures and $500,000 to $1 million for commercial and multi-family structures; and (iii) calls for the creation of a pilot risk-sharing program with FEMA and Write Your Own companies, which are companies that write and service the standard flood insurance policy in their own names.

On 27 April, the Government Accountability Office (“GAO”) published a report on potential actions to reduce federal fiscal exposure and to improve resilience to flood risk. Among other things, the report indicated that “reducing federal exposure and improving resilience to flooding will require comprehensive reform of the NFIP” that will need to include action in six key areas: (i) outstanding debt; (ii) premium rates; (iii) affordability; (iv) consumer participation; (v) other barriers to private-sector involvement; and (vi) NFIP flood resilience efforts.


SEC Chair Confirmation

On 4 May, Jay Clayton was sworn in as SEC Chairman following the Senate’sconfirmation on 2 May, by a vote of 61-37, of his nomination to be the SEC Chairman.

Fair Access to Investment Research Act

On 1 May, the House of Representatives passed, by a vote of 405-2, H.R. 910, the Fair Access to Investment Research Act of 2017, introduced by Rep. French Hill (R-AR). The bill would require the SEC to: (i) provide a safe harbor related to certain investment fund research reports that are published or distributed by a broker-dealer so that they are not deemed to constitute an offer to sell a security; and (ii) exempt broker-dealers distributing research regarding SEC-registered investment companies from certain applicable rules. In addition, the Congressional Budget Office reports that the bill would eliminate an existing right of action allowing investors to sue broker-dealers that issue research reports on exchange-traded funds.

Investment Advice Standards

On 21 April, SEC Acting Chairman Piwowar expressed his support for the 4 April 2017 DOL rule delaying the applicability date of the fiduciary duty rule and stated that there is “an opportunity, with a changeover in administration now, for the SEC to reassert its role in this space.”

Venture Capital Fund and Private Fund Adviser Exemption

On 3 May, the SEC proposed a rule that would amend the definition of a venture capital fund and the private fund adviser exemption from registration under the Investment Advisers Act. The proposed amendments would: (i) include “small business investment companies” in the definition of a venture capital fund; and (ii) exclude the assets of small business investment companies from the definition of a private fund adviser’s “assets under management.” The comment period closes 30 days after publication in the Federal Register.

Tick Size Pilot Data Publication Requirements

On 28 April, the SEC’s Division of Trading and Markets issued two letters granting exemptive relief to FINRA and several exchanges from certain data publication requirements of the National Market System Plan to Implement a Tick Size Pilot Program (“Tick Size Pilot”). The first letter relieves FINRA and the exchanges from their obligation to publicly publish certain Tick Size Pilot data regarding market quality statistics until 31 August 2017 due to confidentiality concerns. The secondletter relieves FINRA and the Chicago Stock Exchange from their obligation to publish Tick Size Pilot data to the public on a monthly basis until 31 August 2017 to provide them time to implement an “aggregated anonymous, group masking methodology” to address confidentiality concerns.


Simplifying and Modernizing Rules

On 3 May, the CFTC requested comments on simplifying and modernizing the Commission’s rules as part of Acting Chairman Giancarlo’s Project “Keep It Simple, Stupid” (“KISS”). The Commission is seeking comments on how existing rules can be “simplified and made less costly to comply.” Acting Chairman Giancarlo clarified that Project KISS aims to decrease the regulatory burden of compliance with existing rules but does not seek to identify rules for modification or repeal. The comment period closes on 30 September 2017.   

CFTC Market Risk Advisory Committee Meeting

On 25 April, the CFTC’s Market Risk Advisory Committee held a hearing to discuss CCP default management, cybersecurity, and the state of the derivatives market.

o    CCP Default Management: The Committee discussed recommendationsprovided by the CCP Risk Management Subcommittee, which included those relating to: (i) communication between market participants and CCPs; (ii) default management committees; (iii) conducting joint CCP fire drills; (iv) the auction process for defaulting clearing member’s portfolio; (v) customer participant in the auction process; and (vi) porting customers from a defaulted clearing member to a non-defaulted clearing member.

o    Cybersecurity: Panelists discussed cybersecurity considerations with emerging technologies in the swaps and futures market, as well as with emerging technologies such as the “internet of things” and distributed ledger technology.  Issues regarding confidentiality and system integrity were also discussed, as well as the need to develop principle-based cybersecurity regulation. Panelists discussed the need for greater global harmonization among regulators and efficient information-sharing among market participants and regulators. One panelist criticized the New York Department of Financial Service’s new cybersecurity framework as being inconsistent with prior cybersecurity frameworks and expressed his concerns that other states will follow suit.  

o    State of the Market: The panelists discussed the impact of Brexit and other “volatility events” on financial markets and generally agreed that such events tend to have anticipated outcomes and therefore lead to shorter volatility periods. Panelists generally noted that regulatory uncertainty has been problematic for commodity markets and investors, including (i) whether the CFTC’s de minimis exemption threshold from swap dealer registration would be amended or eliminated before it automatically drops on 31 December 2018 from $8 billion to $3 billion, and (ii) the imposition of additional capital requirements for non-bank swap entities. Commodity Markets Council Director Jeske recommended that the CFTC clarify its definition of “non-financial end-user” for the purposes of uncleared margin protocol documentation.

Commodity Trading Advisor Recordkeeping

On 20 April, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued an exemption letter permitting commodity trading advisors (“CTAs”) to store their records with third-party record keepers. The exemption relieves CTAs of the requirement to maintain records at their main business office, but continues to require firms maintaining their records with a third-party record keeper to remain responsible for their recordkeeping obligations. To obtain the exemptive relief, a CTA must file a notice with the Commission that includes certain identifying information about the third-party record keeper, such as the record keeper’s name, address, and contact information, as well as representations regarding compliance with recordkeeping and document production requirements. CTAs must make the filing by 30 June 2017.

Regulation AT

On 1 May, the Managed Fund Association and the Alternative Investment Management Association sent a joint letter to the CFTC urging the Commission to abandon a re-proposed Regulation Automated Trading (“Regulation AT”). The Associations criticized the underlying framework of the proposed rule as “flawed and misdirected” and recommended that the Commission reduce electronic trading risk not by pursuing Regulation AT, but by focusing on: (i) implementing risk controls; and (ii) improving the existing regulatory framework. They argued that risk control should exist at the “gatekeeper” levels, such as with designated contract markets (“DCMs”), executing futures commission merchants, and clearing firms, and argued that “simply layering another level of regulation…creates an unwieldy and inefficient regulatory regime.” The Associations advised that if the Commission decides to proceed with Regulation AT, then the Commission should: (i) “[n]arrow the scope of Regulation AT and use more precise definitions”; (ii) “[a]dopt a principles-based approach to regulation of automated trading that will allow market participants to tailor controls to suit their firms’ operations and risks”; (iii) “[a]dopt a preservation requirement for Algorithmic Trading Source Code and use the existing subpoena process for accessing Algorithmic Trading Source Code”; (iv) “[a]dopt greater regulatory protections for the treatment of Algorithmic Trading Source Code and other intellectual property”; and (v) “[w]ork with financial technology companies to address how regulation can most effectively address new technologies and promote safer and more efficient markets, without subjecting market participants to Regulation AT for use of third-party algorithmic trading systems.”

Chief Compliance Officer Duties and Annual Reports

On 3 May, the CFTC proposed amendments to its rules regarding Chief Compliance Officers (“CCOs”). The amendments would: (i) define the term “senior officer” as an entity’s Chief Executive Officer, or equivalent; (ii) “clarify the duties of a CCO of a futures commission merchant, swap dealer, and major swap participant” to include taking “reasonable steps” to resolve conflicts of interest rather than having to resolve “any” conflicts of interest; and (iii) streamline and “modify the CCO annual report’s content and submission requirements.” Noting that there are material differences between the CCO requirements of the CFTC and SEC, the CFTC proposed the amendments to harmonize the rules between the two agencies. The comment period closes 60 days after publication in the Federal Register.


o    8 May: FSOC meeting to discuss the 21 April 2017 presidential memorandum on SIFI designations; the annual reevaluation of the designation of a nonbank financial company; interagency regulatory collaboration and the 3 February 2017 executive order on core principles for financial regulation; and the Council’s 2017 annual report.

o    10 May: SEC Small and Emerging Companies 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).

Ianthe Zabel
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