US Regulatory Update
FY 2018 Financial Services and General Government Appropriations Bill
On 13 July, the House Appropriations Committee approved, by a vote of 31-21, the fiscal year (“FY”) 2018 Financial Services and General Government
Appropriations bill. Among other things, the bill would: (i) provide $1.6 billion in funding for the SEC for FY 2018, $3 million less than its FY 2017 budget; and (ii) eliminate the SEC’s reserve fund, but provide $50 million in additional funding for the SEC’s information technology initiatives. As Bloomberg reports, the bill also contains several provisions that reflect language included in the Financial CHOICE Act (H.R.10).
Testimony of Federal Reserve Chair Janet Yellen
On 12 July, the House Financial Services Committee held a hearing on the Federal Reserve’s Semi-Annual Monetary Policy Report to Congress, with testimony from Federal Reserve Chair Janet Yellen. When questioned by Rep. Gwen Moore (D-WI) about Chair Yellen’s view regarding the Financial Choice Act subjecting the Federal Reserve’s supervision functions to the appropriations process, Chair Yellen stated that she would be “very concerned about subjecting the Fed to [the] appropriations” process and that the Federal Reserve’s “independence in setting [its] own appropriations is an important safeguard.” When questioned by Rep. Tom McArthur (R-NJ) about the role of state insurance departments in regulating group insurers and how they impact the way FSOC looks at non-bank systemically important financial institutions (SIFIs), Chair Yellen indicated that the “FSOC’s focus in designation is the systemic risk that the failure of a given entity could pose to the broad financial system” while most state regulators focus on “supervision [and] on protection of policy holders.”
On 13 July, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the Federal Reserve’s Semi-Annual Monetary Policy Report to Congress, with testimony from Federal Reserve System Chair Janet Yellen. When questioned by Committee Chairman Mike Crapo (R-ID) about whether Congress should change the $50 billion SIFI threshold, Chair Yellen responded in the affirmative. When questioned by Sen. Tim Scott (R-SC) about whether Chair Yellen would support legislation that would retain insurance expertise on the FSOC, Chair Yellen responded in the affirmative and stated that it is “important for FSOC to have insurance expertise.” When questioned by Sen. Mark Warner (D-VA) about areas of vulnerability in “shadow banking” in 2017, Chair Yellen indicated that the Federal Reserve is “constantly looking for vulnerabilities,” but did not highlight any specific areas for review.
SIFIs & FINANCIAL STABILITY
MetLife SIFI Designation
On 6 July, Reuters reported that MetLife Inc. filed a second motion to suspend the FSOC’s appeal of MetLife’s lawsuit over its SIFI designation. The request was filed in anticipation of the expiration of a 60-day abeyance granted by the Court of Appeals for the District of Columbia on 12 May 2017.
U.S.-EU Covered Agreement
On 14 July, the U.S. Department of Treasury and the Office of the U.S. Trade Representative announced their intent to sign the Bilateral Agreement between the U.S. and EU on Prudential Measures Regarding Insurance and Reinsurance. A joint statement between the two agencies explained that the “[a]greement benefits the U.S. economy and consumers by affirming America's state-based system of insurance regulation, providing regulatory certainty, and increasing growth opportunities for U.S. insurers.”
SEC & SECURITIES
SEC Chairman Jay Clayton Speech
On 12 July, SEC Chairman Jay Clayton delivered a speech on his “perspective on the Commission and the principles that should guide” the Commission going forward. Among other things, Chairman Clayton emphasized the following basic principles:
(i) “wholesale changes to the Commission’s fundamental regulatory approach would not make sense”;
(ii) the SEC should continue to have “[d]isclosure and materiality . . . at the heart of [its] regulatory approach”;
(iii) disclosure requirements have expanded “beyond the core concept of materiality”;
(iv) the reduction in U.S. IPOs “is a serious issue for our markets and the country more generally” and the SEC should work towards increasing the attractiveness of U.S. public capital markets;
(v) SEC rules and operations must “reflect the realities of our capital markets” with respect to technology and innovation;
(vi) the SEC should conduct regular, holistic reviews of prior rules and “listen to investors and others about where rules are, or are not, functioning as intended”;
(vii) cooperation between the SEC and other regulatory agencies must increase;
(viii) he intends to “continue deploying significant resources to root out fraud and shady practices in the markets,” particularly to eliminate “system pump-and-dump scammers” and to “support market integrity”;
(ix) “[p]ublic companies have a clear obligation to disclose material information about cyber risks and cyber events,” but the SEC should be “cautious about punishing responsible companies who nevertheless are victims of sophisticated cyber penetrations”;
(x) the SEC should “develop a plan for creating a Fixed Income Market Structure Advisory Committee” to broaden the Commission’s review of market structure to include fixed income markets; and
(xi) the SEC should work with the Department of Labor (“DOL”) to create clear and consistent regulatory standards with regards to the Fiduciary Duty Rule and investment advice to retail investors.
CFTC Commissioner Nominee
On 13 July, President Trump nominated Rostin Behnam, a Senate Democratic aide, for a Democratic Commissioner seat on the CFTC.
CFTC & DERIVATIVES
Review of Swaps Reporting Regulations
On 10 July, the CFTC’s Division of Market Oversight published a staff letter announcing a review of swap data reporting rules in Parts 43, 45, and 49 of the CFTC’s regulations. In the accompanying release, the CFTC announced that the aim is to: (i) “ensure that the CFTC receives accurate, complete, and high quality data on swaps transactions for its regulatory oversight role”; and (ii) to “streamline reporting, reduce messages that must be reported, and right-size the number of data elements that are reported to meet the agency’s priority use-cases for swaps data.” According to the staff letter and roadmap, the initiative will be divided into two major tranches of rule changes. The first tranche “will address swap data repository (‘SDR’) operations, in particular SDRs’ validation of incoming swaps data and swap counterparties’ confirmation of the accuracy of swap data at SDRs,” and for this tranche, the Division intends to issue a notice of proposed rulemaking in Q4 2017 and a final rule in Q2 2018. The second tranche will “address reporting workflows generally, and will focus on standardizing and harmonizing data fields, reducing the number of messages that must be reported on an individual swap, and exploring whether delayed reporting deadlines will improve data quality,” and the Division intends to issue a notice of proposed rulemaking in Q1/Q2 2018 and a final rule in Q4 of 2018. In addition, the Division indicated in the roadmap that it will work to “harmonize data fields with foreign regulators," building on standards set by the Committee on Payments and Market Infrastructure (“CPMI”) and International Organization of Securities Commissions (“IOSCO”). The Division requested comments on its effort with respect to “all ideas on changes to the swap reporting regulations that could help it meet the twin goals of improving data quality while streamlining reporting obligations.” The comment period closes on 21 August 2017. This review is separate from “Project KISS” launched by the Commission on 3 May 2017.
DOL FIDUCIARY DUTY RULE
On 6 July, Rep. Ann Wagner (R-MO) released a discussion draft of a legislative proposal to eliminate and replace the DOL’s Fiduciary Duty Rule with a “best interest” standard under the jurisdiction of the SEC. Among other things, the bill would require brokers-dealers to provide recommendations in the “retail customer’s best interests at the time it is made” and “reflect reasonable diligence” and “reasonable care, skill and prudence that a broker or dealer would exercise based on the customer’s investment profile.” It would also require broker-dealers to disclose “at point of sale,” among other things, “the types of compensation the broker or dealer (or registered representative) receives” and “any material conflict of interest.” The proposal, if implemented, would authorize the SEC to issue “regulations determining the content of [such] disclosures” and require broker-dealers to “avoid, disclose, or otherwise reasonably manage any material conflict of interest.” Furthermore, the discussion draft would not require a broker-dealer to “recommend the least expensive security or investment strategy,” but would generally enable broker-dealers to (i) receive “transaction-based compensation”; (ii) engage in “principal transactions”; (iii) recommend “proprietary products” or “a limited range of products or services”; and (iv) provide an exemption for “the manufacture or sale of annuities” subject to certain conditions.
On 13 July, the House Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing on the “Impact of the DOL Fiduciary Rule on the Capital Markets,” during which the Committee also examined Rep. Ann Wagner’s (R-MO) legislative proposal to eliminate and replace the Rule. Subcommittee Chairman Rep. Bill Huizenga (R-MI) expressed his opposition to the DOL’s “complex Fiduciary [Duty] Rule, which he believes “harms [them] by driving up costs and limiting investor choice,” and cited research published by the American Action Forum (“AAF”) indicating that the Fiduciary Duty Rule is the “most expensive regulatory action of 2016.” Subcommittee Ranking Member Carolyn Maloney (D-NY) expressed support for the Fiduciary Duty Rule, stating that the rule is a “much needed update of the rules governing investment advice [for] retirement savers.” Rep. Randy Hultgren (R-IL) expressed his belief that the Fiduciary Duty Rule “is not workable” and advocated for his constituents by claiming that “[his] constituents, especially those with low retirement account balances, cannot afford for this rule to go into effect as currently proposed.” Rep. Ann Wagner (R-MO) discussed her legislative proposal to eliminate and replace the DOL’s Fiduciary Duty Rule with a “best interest” standard under the jurisdiction of the SEC. With respect to Rep. Wagner’s proposed bill, while Republican committee members generally supported the bill, the Democratic committee members generally opposed it.
UPCOMING EVENTS AND DEADLINES
- 21 July: comments due on DOL’s request for information relating to extending the 1 January 2018 applicability date of certain provisions.
- 27 July: SEC 2017 National Compliance Outreach Program for Broker-Dealers.
- 7 August: comments due on DOL’s request for information relating to the basis of new exemptions or changes/revisions to the Fiduciary Duty Rule and its prohibited tarnation exemptions.
- 21 August: comments due on the CFTC’s comprehensive review of its swap data reporting regulations.