US Regulatory Update
Department of the Interior, Environment, and Related Agencies Appropriations Act, 2018
On 16 August, the House of Representatives Committee on Rules published a modified version of H.R. 3354, the Department of the Interior, Environment, and Related Agencies Appropriations Act, 2018, which will become an omnibus appropriations measure containing eight appropriation bills. The measure will include provisions from: (i) H.R. 3354; (ii) H.R. 3268, the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 2018; (iii) H.R. 3267, the Commerce, Justice, Science, and Related Agencies Appropriations Act, 2018; (iv) H.R. 3280, the Financial Services and General Government Appropriations Act, 2018; (v) H.R. 3355, the Department of Homeland Security Appropriations Act, 2018; (vi) H.R. 3358, the Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations Act, 2018; (vii) H.R. 3362, the Department of State, Foreign Operations, and Related Programs Appropriations Act, 2018; and (viii)H.R. 3353, the Transportation, Housing and Urban Development, and Related Agencies Appropriations Act, 2018. According to Bloomberg, several provisions in the omnibus appropriations measure are drawn from the Financial CHOICE Act, introduced by House Committee on Financial Services Chairman Jeb Hensarling in April, and would “repeal or modify major provisions” of Dodd-Frank by (i) eliminating the authority of the Financial Stability Oversight Council (“FSOC”) to designate nonbank companies as “systemically important”; (ii) no longer requiring large banks or “systemically important” nonbank financial companies to provide regulators with so-called “living wills” ; (iii) “alllow[ing] additional commissioners from regulatory agencies to participate in FSOC votes”; (iv) “bring[ing] FSOC under the discretionary appropriations process”; (v) eliminating the Office of Financial Research; (vi) repealing the Volcker Rule; (vii) prohibiting the SEC from “study[ing] or implement[ing] any rule to require publicly traded companies to disclose political contributions made to tax-exempt groups or dues paid to trade associations”; (viii) “allow[ing]” as many as 500 people to invest in a venture capital fund before the fund would have to register with the SEC”; and (ix) “expand[ing] an SEC legal safe harbor to cover broker-dealers that publish or distribute research reports on certain investment funds, such as exchange-traded funds.”
On 24 August, several regulatory agencies published their semi-annual regulatory agendas, released pursuant to the Regulatory Flexibility Act, listing regulatory actions that have been proposed or are being finalized. Among others, the regulatory agencies include those of the: (i) SEC; (ii) CFTC; (iii)Department of Labor (“DOL”); and (iv) Department of the Treasury.
SEC & Securities
SEC Releases Guidance for “T+2” Settlement Cycle
On 22 August, the SEC published guidance to help market participants prepare for upcoming changes to the standard settlement cycle. On 5 September. the standard settlement cycle for most securities transactions will be shortened from three business days after the trade date (“T+3”) to two days (“T+2”). As the SEC’s release explains, because of these changes, “when buying securities, [an individual] may need to pay for securities transactions one business day earlier.”
SEC Names Dalia Blass as Director of the Division of Investment Management
On 31 August, the SEC announced that Dalia Blass will be named Director of the SEC’s Division of Investment Management. Previously, as the announcement explains, Blass “serv[ed] in a number of leadership roles in the Division of Investment Management, most recently as Assistant Chief Counsel.” She is joining the SEC as Director of the Division of Investment Management from Ropes & Gray LLP. In the announcement, Chairman Clayton noted that "Dalia's years of service here at the SEC and extensive experience in the private sector will make her a valuable asset to the agency and the Division of Investment Management."
SEC Names Dr. Jeffrey H. Harris as Director of the SEC’s Division of Economic and Risk Analysis
On 31 August, the SEC announced that Dr. Jeffrey H. Harris will be named Director of the SEC's Division of Economic and Risk Analysis (“DERA”). He is currently a professor at the Kogod School of Business at American University in Washington, D.C., and previously served as Chief Economist at the CFTC. In the announcement, Chairman Clayton noted that "Dr. Harris’s extensive research on securities and commodities issues and experience in government, academia, and the private sector make him a great fit to lead DERA’s team of dedicated economists.”
CFTC & Derivatives
Guidance on Capital Treatment of Certain Cleared Derivatives Contracts
On 14 August, staffs of the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation published interagencysupervisory guidance on the regulatory capital treatment of centrally cleared "settled-to-market" derivative contracts. As noted in the guidance, the regulators are providing it “in light of recent changes to the rulebooks of certain central counterparties.” According to the guidance, “for a derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of the contract is zero, the remaining maturity equals the time until the next reset date.” The guidance also states that “for the purpose of the regulatory capital rules, if, after accounting and legal analysis, the institution determines that (i) the variation margin payment on a centrally cleared Settled-to-Market Contract settles any outstanding exposure on the contract, and (ii) the terms are reset so that fair value of the contract is zero, the remaining maturity on such contract would equal the time until the next exchange of variation margin on the contract.” The guidance also explains that “in conducting its legal analysis to determine whether variation margin may be considered settlement of outstanding exposure under the regulatory capital rules, an institution should evaluate whether the transferor of the variation margin has relinquished all legal claims to the variation margin and whether the payment of variation margin constitutes settlement under the central counterparty’s rulebook, any other applicable agreements governing the derivative contract, and applicable law.”
CFTC Commissioner Sharon Bowen
On 30 August, Bloomberg reported that CFTC Commissioner Sharon Bowen’s senior policy advisor Steve Adamske indicated that Commissioner Bowen will leave the Commission on 29 September 2017. Commissioner Bowen announced in June her intent to leave the Commission “within the next few months,” but did not provide an exact date until now.
DOL Fiduciary Duty Rule
Delay of Applicability Date of Certain Aspects of the DOL’s Fiduciary Duty Rule
On 28 August, the Office of Management and Budget approved a proposed DOL regulatory action (published in the Federal Register on 31 August) to delay the applicability date of certain aspects of the DOL’s Fiduciary Duty Rule. The proposed action would extend the transition period and postpone from 1 January 2018 to 1 July 2019 the applicability date of Sections II and IX of the Best Interest Contract Exemption, Section VII of the Class Exemption for Principal Transactions in certain assets between investment advice fiduciaries and employment benefit and IRAs, and “certain amendments to Prohibited Transaction Exemption 84-24” (relating to “certain transactions involving insurance agents and brokers, pension consultants, insurance companies, and investment company principal underwriters”). In the proposed action, the DOL explains that the “purpose of the proposed amendments is to give the [DOL] the time necessary to consider possible changes and alternatives to these exemptions” and that “without a delay in the applicability dates, regulated parties may incur undue expense to comply with conditions or requirements that it ultimately determines to revise or repeal.” DOL has requested comments on its proposed regulatory action, and the comment period closes on 15 September 2017.
Department of Justice Signals that Class-Action Provision of DOL Fiduciary Duty Rule May Be Repealed
On 23 August, the Department of Justice (“DOJ”) filed a letter with U.S. District Judge Susan Richard Nelson as part of Thrivent Financial’s lawsuit against the DOL over its Fiduciary Duty Rule, suggesting that the class-action provisions of the Rule may soon be repealed. In its lawsuit against the DOL, Thrivent argued that the DOL exceeded its authority under the Federal Arbitration Act by allowing advisory clients to file class-action lawsuits as part of the Rule’s Best Interest Contract Exemption, which would force Thrivent to eliminate existing arbitration agreements with its clients and prevent Thrivent from entering into future arbitration agreements. In the letter, DOJ argues that “a stay of the litigation is the most efficient way to address this claim regarding [the class-action] provision that is not currently applicable to plaintiff” and one that might be “mooted in the near future,” suggesting that the Fiduciary Duty Rule’s class-action provision may be repealed soon such that Thrivent’s arguments become moot.
UPCOMING EVENTS AND DEADLINES
o 7 September: U.S. House Committee on Financial Services has scheduled a hearing entitled “Oversight of the Financial Industry Regulatory Authority.”
o 7 September: U.S. Senate Committee on Banking, Housing, and Urban Affairs has scheduled a vote on the nominations of Joseph Otting as Comptroller of the Currency and Randal Quarles as Vice Chairman for Supervision of the Board of Governors of the Federal Reserve System. The Committee will also vote on S. 1463, the Financial Stability Oversight Council Insurance Member Continuity Act, which would amend the Dodd-Frank Act to allow the Council’s independent member with insurance expertise to continue serving for up to 18 months past 30 September 2017, when his term is currently set to expire, or until the confirmation of a replacement.
o 15 September: comments due on DOL rule to delay the applicability date of certain aspect of the DOL’s Fiduciary Duty Rule.
o 23 October: CFTC Office of International Affairs 25th Annual Symposium.