US Regulatory Updaate
Fiscal Year 2018 Budget Proposals Released
On 23 May, the Office of Management and Budget (“OMB”) published the Presidential Budget for fiscal year (“FY”) 2018 and an accompanying volumedetailing the $57.3 billion in the President’s proposed discretionary programs savings. Among other things, the budget: (i) reduces the Securities and Exchange Commission’s (“SEC”) operating budget for FY 2018 by $3 million from current funding levels to $1.602 billion and eliminates the SEC Reserve Fund, a non-appropriated source of financing for enhancements to SEC IT infrastructure and systems created by the Dodd-Frank Act; and (ii) keeps the CFTC operating budget for FY 2018 unchanged at $250 million.
On 23 May, the SEC published its budget request for FY 2018. The SEC requested a budget of $1.602 billion, and indicated that it anticipates continued access to its Reserve Fund, which it argues has been “critically important” to its efforts to “keep pace with the rapid technology advancements occurring in [the SEC’s] regulatory areas, as well as meeting the challenges of cybersecurity.”
On 23 May, the CFTC published its budget request for FY 2018. The CFTC requested a budget of $281.5 million, a $31.5 million increase from its current funding and the funding proposed by Presidential Budget. In the budget request, CFTC Acting Chairman and Chairman Nominee J. Christopher Giancarlo explained that the Commission requested the budget increase as a result of a “thorough and informed assessment of what the CFTC needs to execute its mission in FY 2018.” The budget request also indicated that the CFTC: (i) will seek to “adopt speculative position limit rules pertaining to certain physical swaps and futures contracts”; (ii) has begun “incorporating uncleared positions into its cleared risk surveillance program” to monitor uncleared swaps; and (iii) aims to develop, by FY 2019, “dashboards to measure and monitor risk [and] conduct robust quantitative analysis of impact of regulations on liquidity, volatility, market quality and transaction costs.” Also on 23 May, CFTC Commissioner Sharon Bowen released a statement advocating for a larger budget increase for FY 2018. The statement explains that she voted “to advance this budget request for procedural reasons, but do not support it” as the requested budget is “inadequate and will prevent [the CFTC] from being able to fulfill [its] mission of protecting investors and consumers.”
Treasury Nominees Cleared by Senate Banking Committee for Senate Vote
On 23 May, the Senate Banking Committee reported three Treasury nominees out of Committee: (i) Heath P. Tarbert (for Assistant Secretary); (ii) Sigal Mandelker (for Under Secretary for Terrorism and Financial Crimes); and (iii) Mr. Marshall Billingslea (for Assistant Treasury for Terrorist Financing). The nominations were subsequently placed on the Senate Executive Calendar.
Deputy Treasury Secretary Nominee Withdraws from Consideration
On 19 May, James Donovan, a Goldman Sachs executive and University of Virginia School of Law Adjunct Professor, withdrew his name from consideration for Deputy Secretary of Treasury, the second highest position at Treasury, citing in a statement his desire to “at this time … focus on [his] family,” according to numerous media reports. President Trump originally announced his intent to nominate Donovan on 14 March, 2017.
Joseph Otting Announced as Trump’s Comptroller of the Currency Nominee
On 5 June, President Trump announced his intent to nominate Joseph Otting, former CEO of OneWest Bank N.A., for Comptroller of the Currency. Last month, Keith Noreika, a former partner at Simpson Thacher & Bartlett LLP, became Acting Comptroller of the Currency upon former Comptroller Thomas Curry stepping down on 7 May 2017.
National Flood Insurance Program
On 25 May, House Financial Services Committee Housing and Insurance Subcommittee Chairman Sean Duffy (R-WI) released draft sections of legislation to reauthorize and amend the National Flood Insurance Program (“NFIP Discussion Draft”), as well as an accompanying statement noting that the bill has “incorporated ideas from both Republicans and Democrats, Members from inland and coastal areas, and stakeholders across several industries.” Among other things, the NFIP Discussion Draft would: (i) decrease the maximum allowance paid to companies administering the Write-Your-Own (“WYO”) Program from 32 to 25 percent of the chargeable premium for “flood insurance coverage made available under the NFIP”; (ii) “decrease from 18 to 15 percent the cap on annual rate increases”; (iii) “limit the chargeable risk premium of any single family residential property to $10,000 per year”; (iv) encourage private market participation in the program by clarifying that “flood insurance offered by a private carrier outside of the NFIP can satisfy that Act’s mandatory purchase requirement” and allowing “policyholders who cancel their NFIP policies during the middle of the policy term to receive a pro-rata refund on their premiums if the policy is replaced with private flood insurance”; and (v) provide the Federal Emergency Management Agency with “additional authorities and responsibilities for overseeing litigation conducted by WYO insurance companies acting on behalf of the NFIP.”
RETAIL INVESTMENT ADVICE: FIDUCIARY DUTY
SEC Review and Request for Comments on Retail Investment Advice
On 1 June, SEC Chairman Jay Clayton announced a review of the current market for retail investment advice, the SEC’s fiduciary standards for brokers providing investment advice to retail investors, the impact of the Department of Labor's (“DOL”) fiduciary duty rule on retail investors and SEC-regulated entities, and the impact to retail investors of “potential conflicts of interest related to the provision of investment advice.” Noting the upcoming 9 June 2017 applicability date of DOL’s fiduciary duty rule, which he stated could have “significant effects on retail investors and entities regulated by the SEC,” Chairman Clayton explained the need for “an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends” in order to enable the Commission to “evaluate the range of potential regulatory actions it could take.” To facilitate the review, he requested comments addressing a number of considerations including, among others: (i) how investor and industry experiences related to the implementation of the DOL’s fiduciary duty rule should “inform the Commission's analysis”; (ii) “ways in which the Commission should take into account the [DOL’s fiduciary duty rule] in any potential actions relating to the standards of conduct for retail investment advice”; (iii) whether there are “particular areas where conflicts are more prevalent [and/or] have greater potential for harm”; (iv) whether the Commission should implement a “disclosure-based” or “standards-of-conduct-based” approach to regulating retail investment advice and how such approaches should be implemented; and (v) what regulatory approaches in non-U.S. jurisdictions “have impacted the market for retail investment advice in those jurisdictions in a manner that would be instructive to [the SEC’s] consideration.” The announcement did not indicate when the review would be conducted or when the comment period would close.
SEC & SECURITIES
SEC Disgorgement Powers – Supreme Court Decision
On 5 June, the Supreme Court unanimously held that a five-year statute of limitations applies to SEC enforcement proceedings seeking disgorgement. Under 28 U.S.C. § 2462, an action to enforce “any civil fine, penalty, or forfeiture” is subject to a five-year limitation period. In representing the SEC, the Department of Justice argued that disgorgement orders are different to the sanctions listed as such orders are imposed as a remedy for “unjust enrichment.” Justice Sonia Sotomayor, writing for the Supreme Court, disagreed with the Department of Justice’s argument, stating that “SEC disgorgement…bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate” and thus subject to the prescribed five-year statute of limitations.
Corporate Board Diversity Disclosures
On 25 May, Rep. Gregory Meeks (D-NY) and 29 House Democrats sent a letter to SEC Chairman Clayton urging him to consider implementing more stringent and prescriptive corporate board diversity disclosure requirements for public companies. The lawmakers argue that because the SEC’s current corporate diversity requirements do not define the term “diversity,” disclosures are “vague and of nominal use” to shareholders and stakeholders. Noting that both investors and the SEC’s Advisory Committee on Small and Emerging Companies have recognized the need for a more robust diversity disclosure regime, as well as Chairman Clayton’s willingness to work with “fellow commissioners, staff…and the [SEC’s Advisory Committee on Small and Emerging Companies] to monitor this issue,” the lawmakers urged Chairman Clayton to initiate a “formal rulemaking effort to improve SEC’s corporate board diversity disclosures.”
CFTC & DERIVATIVES
Monthly Risk Reporting Requirements
On 30 May, the National Futures Association (“NFA”) published a Notice to Members announcing new monthly risk data reporting requirements for swap dealers and major swap participants. To assist the NFA in identifying firms that “pose heightened risk and allocate NFA's regulatory oversight resources accordingly,” swap dealers and major swap participants will be required to submit electronically a monthly report on certain risk metrics, including: (i) “Value at Risk (VaR)”; (ii) “Total Stressed VaR (SVaR)”; (iii) “Interest Rate Sensitivity”; (iv) “Credit Spread Sensitivity”; (v) “FX Market Sensitivities”; (vi) “Commodity Market Sensitivities”; (vii) “Total Swaps Current Exposure before Collateral”; (viii) “Total Swaps Current Exposure net of Collateral”; (ix) “Total Credit Valuation Adjustment or Expected Credit Loss”; (x) a list of the fifteen largest swaps counterparty current exposures before collateral; and (xi) a list of the fifteen largest swaps counterparty current exposures net of collateral. Monthly reports must be filed by the last business day of the month following the reporting month. The first report will cover risk data for December 2017 and will be due by 31 January 2018.
Correction of Clerical or Operational Errors for SEFs and DCMs
On 30 May, the CFTC’s Division of Market Oversight and Division of Clearing and Risk issued a no-action letter to swap execution facilities (“SEFs”) and designated contract markets (“DCMs”) to correct clerical and operational errors and extend previous no-action relief. Subject to certain conditions, the no-action relief allows SEFs and DCMs to correct clerical or operational errors: (i) that caused a swap to be rejected for clearing; or (ii) are “discovered after a swap has been cleared.” The Commission indicated that it will continue seeking a permanent solution to this issue and that the relief provided will expire on the effective date of any changes to the relevant Commission regulations.
Swap Valuation Dispute Requirements
On 25 May, the NFA issued a proposed Interpretive Notice regarding swap valuation dispute requirements. Under the NFA filing requirements rule, swap dealers are required to notify the NFA of any swap valuation dispute that exceeds $20 million in value. To improve the quality of data reported to the NFA for such disputes, the proposed Interpretive Notice would, if implemented, among other things (i) clearly identify the types of dispute that must be reported; and (ii) augment the “notices of reportable swap valuation disputes” that swap dealers are required to submit to include “standardized information that can be easily tracked and analyzed across [swap dealers] and the industry.” The NFA intends to notify swap dealers of the specific data elements to be reported through a Notice to Member if the proposed Interpretative Notice is approved by the CFTC.
On 23 May, the CFTC adopted a final rule intended to “modernize and make technology neutral the form and manner in which regulatory records must be kept.” Among other things, the new rule eliminates requirements for a records entity to: (i) maintain electronic records “in the format in which it was originally created”; (ii) retain electronic records in a “non-rewritable, non-erasable format” (the “write once, read many” (“WORM”) requirement); and (iii) engage a “third-party technical consultant” regarding certain record filing requirements.
Anti-retaliation Protections for Whistleblowers
On 22 May, the CFTC adopted a final rule designed to better protect whistleblowers from retaliation by employers and establishing a new process for reviewing whistleblower claims. Among other things, the new rule: (i) prohibits employers from “taking any action to impede an individual from communicating directly with the [CFTC]”; (ii) grants the CFTC the authority to bring enforcement actions against employers who retaliate against a whistleblower; (iii) preserves a whistleblower’s eligibility for an award even when the whistleblower provides the Commission “original information without being the original source of the information”; (iv) includes certain “foreign futures authorities” in the list of persons or authorities that a whistleblower can provide information to before providing information to the Commission and still retain “original source status”; (v) extends from 120 days to 180 days the period of time a whistleblower needs to submit a Form TCR (Tips, Complaint, or Referral) to the Commission after providing information “to Congress, any other federal or state authority, a registered entity, a registered futures association, a self-regulatory organization, or [other authorized persons]” other than the CFTC; and (vi) allows whistleblowers to receive an award from “covered judicial or administrative actions” brought by the CFTC and “based on Related Actions by certain foreign authorities.”
FFIEC Cybersecurity Assessment Tool
On 31 March, the Federal Financial Institutions Examination Council (“FFIEC”) released an update to its Cybersecurity Assessment Tool, which was developed to help firms identify and address their cybersecurity risks and preparedness. The update reflects recent changes to the FFIEC’s IT Examination HandBooks and provides additional ways firms can react and address cybersecurity incidents.
UPCOMING EVENTS AND DEADLINES
o Week of 5 June: House of Representatives vote on the Financial CHOICE Act.
o 7 June: House Financial Services Committee Hearing on flood insurance reform.
o 7 June: Senate Banking Committee Hearing to Consider the Nomination of David Malpass for Under Secretary of the Treasury for International Affairs
o 8 June: comments due on SEC proposed amendments on venture capital fund and private fund adviser exemptions.
o 20 June: CFTC Market Risk Advisory Committee meeting to discuss surveillance on CCPs, the impact of research and analysis to the CCP regulatory framework, and potential impacts of Brexit on the financial market.
o 22 June: SEC Investor Advisory Committee Meeting to discuss capital formation, initial public offerings, and certain provisions of the Financial CHOICE Act relating to the SEC.
o 23 June: North American Securities Administrators Association cybersecurity roundtable.
o 30 June: deadline to file notice with CFTC regarding third-party record keeping.