US Regulatory Update
SIFIs & FINANCIAL STABILITY
MetLife SIFI Designation
On 2 August, the Court of Appeals for the District of Columbia issued an Order (posted online by Bloomberg) suspending the Financial Stability Oversight Council’s (“FSOC”) appeal of the decision by the U.S. District Court regarding MetLife’s lawsuit over its designation by FSOC as “systemically important.” The Court’s Order was issued in advance of the publication of Treasury Secretary Steven Mnuchin’s report assessing the efficacy of FSOC’s authority to designate non-banks as “systemically important,” which, according to Bloomberg, will be released in mid-October. That report is being prepared pursuant to President Trump’s April 2017 Memorandum to Secretary Mnuchin. In its 2 August Order, the Court of Appeals instructed MetLife and the FSOC to “file motions to govern future proceedings in this case” by 17 November 2017 or “within 30 days of the issuance of the Secretary’s report on the FSOC’s designation process, whichever first occurs.”
SEC & SECURITIES MARKETS
Access to Capital and Market Liquidity
On 8 August, the SEC’s Division of Economic and Risk Analysis published a report regarding access to capital and market liquidity. The report provided a review of “the impacts of the Dodd-Frank Act . . . as well as other financial regulations, such as Basel III, on access to capital . . . and market liquidity.”
o Primary Issuance and Access to Capital: Among other things, the report “[did] not find that total primary market security issuance is lower after the enactment of the Dodd-Frank Act . . . and during the implementation of Basel III,” but found that: (i) primary market security issuance “may have increased around the implementation of the JOBS Act”; (ii) “[r]ecent years have seen an increase in the number of small company IPOs”; and (iii) “[p]rivate market issuance of debt and equity . . . has increased substantially from $1.16 trillion in 2009 to $1.87 trillion in 2015, amounting to $1.68 trillion in 2016.”
o Market Liquidity: Among other things, the report found that: (i) in U.S. Treasury Markets, there is “no empirical evidence consistent with the hypothesis that liquidity has deteriorated after regulatory reforms,” and there is “no support for a causal link between the Volcker Rule and U.S. Treasury market liquidity conditions”; (ii) “[i]n corporate bond markets, trading activity and average transaction costs have generally improved or remained flat”; and (iii) while “[d]ealers in the corporate bond markets have, in aggregate, reduced their capital commitment since the 2007 peak . . . there has not been a commensurate decrease in the number of dealers participating in the market.”
SEC Equity Market Structure Advisory Committee
On 9 August, the SEC issued a Notice of Federal Advisory Committee Renewal that renews the SEC’s Equity Market Structure Advisory Committee for five more months. The Committee was set to expire this month. As explained in the SEC’s Notice, the Committee “provides the Commission with diverse perspectives on the structure and operations of the U.S. equities markets, as well as advice and recommendations on matters related to equity market structure.”
On 3 August, the U.S. Senate voted unanimously to confirm the nomination of J. Christopher Giancarlo as CFTC Chairman and Brian Quintenz and Rostin Behnam as CFTC Commissioners.
CFTC & DERIVATIVES
Extension of No-Action Relief: Aggregation Requirements
On 10 August, the CFTC’s Division of Market Oversight (“DMO”) issued a no-action letter extending relief to certain market participants from “certain aspects of the position aggregation requirements” and extending previous no-action relief. As explained in the 10 August no-action letter, in 2016 the CFTC promulgated an Aggregation of Positions Rule, which sets forth “accounts and positions a person must aggregate for the purpose of determining compliance with the applicable position limit levels set forth in Commission Regulation 150.2, and includes a process by which a person may file with the Commission a notice seeking an exemption from such aggregation requirements.” Subsequently, on 6 February 2017, the DMO issued no-action letter 17-06, which, as explained in the 10 August no-action letter, granted “relief from all of the notice filing requirements under Commission Regulation 150.4(c) to any person or entity that is eligible to rely on an exemption from aggregation under Commission Regulation 150.4(b).” Because this relief expires on 14 August 2017, the DMO issued its 10 August no-action letter granting relief from certain aspects of position aggregation requirements, including: (i) “notice filing requirements of Commission Regulation 150.4(c)”; (ii) “definitions of ‘eligible entity’ and ‘independent account controller’ referenced in the independent account controller exemption in Commission Regulation 150.4(b)(4)”; (iii) “the ‘aware or should be aware language’ in 150.4(b)(2)”; (iv) “the firewall conditions for the owned entity exemption in 150.4(b)(2)(i)(A)”; and (v) “the substantially identical trading requirement in Commission Regulation 150.4(a)(2).” This relief will remain in effect until 12 August 2019.
Swaps Trading Rules
On 11 August, as reported by the Wall Street Journal, CFTC Chairman J. Christopher Giancarlo indicated that “one of his first tasks” is to amend the CFTC’s swaps trading rules. He noted, however, that “[t]he swaps market cannot, will not trade the way futures trade.” Chairman Giancarlo also made clear that his agenda would not be “deregulatory” in nature. Instead, he believes that the CFTC must “make sure that [its] regulations are periodically reviewed to make sure they are . . . optimized to minimize the burdensomeness and the cost for those who have to comply with the regulations.”
DOL FIDUCIARY DUTY RULE
On 9 August, the Department of Labor (“DOL”) submitted a proposal to the Office of Management and Budget (“OMB”) to delay the applicability date of certain aspects of the DOL’s Fiduciary Duty Rule. The proposal would extend the transition period and postpone from 1 January 2018 to 1 July 2019 the applicability date of the Best Interest Contract Exemption, Class Exemption for Principal Transactions, and Prohibited Transaction Exemption 84-24 (relating to certain transactions involving insurance agents and brokers, pension consultants, insurance companies, and investment company underwriters).
On 3 August, the DOL issued a new set of FAQs regarding the DOL’s Fiduciary Duty Rule. The new set of FAQs cover: (i) whether “covered service providers” for ERISA plans providing “fiduciary investment advice as a result of the Fiduciary Rule becoming applicable on June 9, 2017 need to update their disclosures under the 408b-2 regulation,” which “requires service contracts and arrangements to be reasonable and . . . prohibits service providers from receiving more than reasonable compensation,” and “in particular to disclose their status as fiduciaries”; (ii) “whether recommendations to plan participants and IRA owners to contribute to or increase contributions to a plan or IRA constitute fiduciary investment advice under the Fiduciary Rule”; and (iii) “whether recommendations to employers and other plan fiduciaries on plan design changes intended to increase plan participation and contribution rates constitute fiduciary investment advice under the Fiduciary Rule.”
Observations from SEC Cybersecurity Examinations
On 7 August, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a risk alertregarding OCIE’s findings from its Cybersecurity 2 Initiative, announced in September 2015. According to the alert, there was “an overall improvement in firms’ awareness of cyber-related risks and the implementation of certain cybersecurity practices since the Cybersecurity 1 Initiative,” the results of which were released in February 2015. However, OCIE also highlighted several cybersecurity risk issues that need to be better addressed by firms, including: (i) “[p]olicies and procedures . . . not reasonably tailored” to firms’ operations; (ii) firms appearing not to “adhere to or enforce policies and procedures; (iii) “policies and procedures . . . not reflect[ing] . . . firms’ actual practices”; and (iv) “Regulation S-P-related issues among firms that did not appear to adequately conduct system maintenance, such as the installation of software patches to address security vulnerabilities and other operational safeguards to protect customer records and information.” OCIE reminded firms that “[c]ybersecurity remains one of the top compliance risks for financial firms” and that it “will continue to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at firms.”
UPCOMING EVENTS AND DEADLINES
o 21 August: comments due on the CFTC’s comprehensive review of its swap data reporting regulations.