US Regulatory Update
On 8 September, President Donald Trump signed into law H.R. 601, the Continuing Appropriations Act of 2018 and Supplemental Appropriations for Disaster Relief Requirements Act of 2017. Provisions of the Act: (i) provide emergency funding to the Federal Emergency Management Agency to address current hurricane relief efforts; (ii) temporarily extend the public debt limit until 8 December 2017; and (iii) provide funding for the government and extend the National Flood Insurance Program through 8 December 2017.
On 14 September, the House of Representatives passed, by a vote of 211-198, H.R. 3354, an omnibus appropriations bill containing twelve stand-alone bills. Several provisions in the omnibus appropriations measure were drawn from the Financial CHOICE Act, introduced by House Committee on Financial Services Chairman Jeb Hensarling in April. The omnibus bill would modify Dodd-Frank by: (i) eliminating the authority of the Financial Stability Oversight Council (“FSOC”) to designate nonbank financial companies as “systemically important” (“nonbank SIFIs”); (ii) no longer requiring large banks or nonbank SIFIs to provide regulators with “living wills”; (iii) granting authority to additional commissioners and other senior members from FSOC member regulatory agencies to vote in FSOC meetings; (iv) providing funding to the FSOC through Congress’s discretionary appropriations process; (v) eliminating the Office of Financial Research; (vi) repealing the Volcker Rule; (vii) prohibiting the SEC from studying or implementing any rule “regarding the disclosure of political contributions to tax exempt organizations, or dues paid to trade associations”; (viii) establishing a new “qualified venture capital fund” exemption allowing 500 people to invest in such a fund before having to register with the SEC; and (ix) expanding the SEC safe harbor for “investment fund research” to cover broker-dealers that publish or distribute research reports on certain investment funds. Additionally, if passed, the bill would repeal the DOL’s Fiduciary Duty Rule. As reported by Bloomberg, the Senate has not yet passed any appropriations bills.
House Financial Services Subcommittee Considers Legislation to Reduce SIFI $50 Billion Threshold
On 7 September, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a meeting to examine six legislative proposals aimed at “improving the regulatory environment in order to boost economic growth.” Among others, the subcommittee considered H.R. 3312, the Systemic Risk Designation Improvement Act of 2017, introduced by Rep. Blaine Luetkemeyer (R-MO), which would amend the Dodd-Frank Act to eliminate the $50 billion threshold for designating a bank holding company as a SIFI and instead instruct the Federal Reserve to use “an indicator-based measurement approach based on a particular institution’s size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity.”
House Financial Services Subcommittee on Capital Markets, Securities, and Investment Hearing on the Oversight of FINRA
On 7 September, the House Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing on the Oversight of FINRA. FINRA President and CEO Robert Cook testified on issues relating to: (i) bonds; (ii) brokers; (iii) capital formation; (iv) the Consolidated Audit Trail (“CAT”); (v) cybersecurity; (vi) the DOL Fiduciary Duty Rule; (vii) diversity; (viii) FINRA oversight, transparency, and accountability; (ix) FinTech; (x) maker-taker fees; and (xi) processing fees.
- Capital Formation: Mr. Cook noted that FINRA recently issued a request for comments on its rules related to going public and is now reviewing the comments. He also addressed other issues related to the impact of the Jumpstart Our Business Startups Act on IPO gross spreads.
- Consolidated Audit Trail: When questioned by Rep. Brad Sherman (D-CA) and Rep. Warren Davidson (R-OH) regarding the status of the CAT, Mr. Cook explained that he was unable to answer some questions because FINRA was not selected by the SEC to operate the CAT. However, Mr. Cook noted that FINRA intends to replace its Order Audit Trail System (“OATS”) and electronic blue sheets with the CAT when the CAT is of “sufficient accuracy.” He said replacing electronic blue sheets may take longer because they contain large volumes of historical data.
- Cybersecurity: When questioned by Rep. Davidson whether there is currently too much regulatory duplication regarding cybersecurity, Mr. Cook responded that it is an area that requires more coordination between regulators and that FINRA has tried to avoid dictating a path for firms due to differing expectations from regulators.
- DOL’s Fiduciary Duty Rule: When questioned by Rep. Bruce Poliquin (R-ME) as to whether he has observed firms halting their provision of advice to smaller businesses in response to the Fiduciary Duty Rule, Mr. Cook indicated that FINRA has conducted twelve roundtables around the country regarding this issue and that there have been concerns from small firms related to compliance with the Rule. He also noted that it would be beneficial to investors if there were a uniform fiduciary standard. When questioned by Rep. Ann Wagner (R-MO) as to whether the DOL consulted with FINRA in drafting the Fiduciary Duty Rule, Mr. Cook replied that FINRA submitted a comment letter during the rulemaking process and that the DOL had considered FINRA’s comments in drafting the rule. Rep. Wagner noted that the SEC had requested comments regarding investment advice and questioned what role, if any, FINRA would have in the SEC drafting a uniform fiduciary standard. Mr. Cook stated that FINRA would work with the SEC and that it would have to assess whether to amend its own rulebook to reflect the adoption of a new SEC rule.
- Maker-Taker Fees: When questioned by Rep. Stephen Lynch (D-MA) as to whether the conflict within the maker-taker rule is leading to sub-optimal order routing by brokers, Mr. Cook stated that FINRA has taken several steps to address these issues, including issuing guidance for firms on best execution and implementing sweep reviews related to best execution. He explained that FINRA will continue to examine these issues. He also noted that the SEC’s Equity Market Structure Advisory Committee is examining rebates and the maker-taker model.
On 7 September, the Senate Committee on Banking, Housing, and Urban Affairs voted in favor of the nomination of Joseph Otting, by a vote of 13-10, to be the Comptroller of the Currency and Randal Quarles, by a vote of 17-6, to be the Vice Chairman for Supervision of the Board of Governors of the Federal Reserve System. Their nominations will now go to the full Senate for confirmation, which has yet to be scheduled.
On 6 September, Stanley Fischer, the Vice Chairman of the Board of Governors of the Federal Reserve System (“Board”), announced that he intends to resign from the Board “on or around October 13, 2017.” Mr. Fischer cited “personal reasons” for his resignation.
Financial Stability Oversight Council Insurance Member Continuity Act
On 5 September, the House of Representatives passed, by a vote of 407-1, H.R. 3110, the Financial Stability Oversight Council Insurance Member Continuity Act. The bill would amend the Dodd-Frank Act to allow the FSOC’s independent member with insurance expertise to continue serving for up to 18 months past 30 September 2017, when the term for the current independent member, S. Roy Woodall, Jr., is set to expire, or until the confirmation of a replacement, whichever occurs first. A companion bill,S. 1463, was adopted by the Senate Banking Committee on 7 September 2017.
Rep. Duffy and Rep. Moore Introduce Consumer Financial Protection Bureau Reform Bill
On 12 September, House Financial Services Subcommittee on Housing and Insurance Chairman
Sean Duffy (R-WI) and Rep. Gwen Moore (D-WI) together introduced the Business of Insurance Regulatory Reform Act to limit the jurisdiction of the Consumer Financial Protection Bureau (“CFPB”) in the business of insurance. According to the press release, the bill was introduced because the CFPB “has pushed the boundaries of its own authority by regulating products that fall under the purview of state insurance regulators . . . despite the prohibition under current law,” and the bill: (i) “clarifies the business of insurance in the Consumer Financial Protection Act of 2012 by defining exceptions and limitations as to jurisdiction of the CFPB”; (ii) “limits jurisdiction of CFPB and reaffirms that enforcement is broadly construed in favor of the authority of the State insurance regulator; and (iii) provides that “jurisdiction to be limited includes any person providing a consumer financial product or service when that person is engaged in the business of insurance.”
SEC & SECURITIES
President Trump Announces Intention to Nominate Robert Jackson as SEC Commissioner
On 1 September, President Trump announced his intent to nominate Robert Jackson, a Professor at Columbia Law School, as a commissioner for the SEC.
Dialogue on Exchange-Traded Investment Products
On 8 September, the SEC’s Division of Economic and Risk Analysis and the New York University’s Salomon Center for the Study of Financial Institutions co-hosted a dialogue on exchange-traded investment products (“ETPs”). SEC Commissioner Michael Piwowar delivered an opening statement in which he discussed the benefits and dangers of ETPs. He stated that “ETPs are among the most significant financial innovations in recent decades” and noted that their growth has stemmed from several factors, including: (i) providing “easy access to a broad range of asset classes”; (ii) having lower costs; and (iii) allowing more sophisticated investors to pursue “unique economic exposures that may not otherwise be possible,” which “helps ‘complete’ markets.” He warned, however, that “benefits afforded to investors through investment in ETPs often rely on certain institutional market participants . . . to engage in arbitrage trading.” He emphasized the “importance of rigorous academic study on this important asset class” and said the SEC is “eager” to hear about ETPs from investors and the industry.
Review of Certain Actions Taken by Commissioner Piwowar as Acting Chairman
On 24 August, the SEC’s Office of Inspector General released a memorandum regarding the findings of its review of Commissioner Piwowar’s actions during his tenure as Acting Chairman. The review,requested by four Senate Banking Committee Democrats in March 2017, addressed whether Commissioner Piwowar “exceeded his authority” when he “took actions related to SEC policy, regulation, or guidance [regarding the]: (1) Conflict Minerals rule; (2) Pay Ratio rule; and (3) Formal Order of Investigation delegation.” The Office concluded that there is no evidence that Commissioner Piwowar’s actions: (i) “exceeded his authority during his 3-month tenure as SEC Acting Chairman”; (ii) “violated other procedural requirements under current law’; (iii) “lacked adequate justification”; or (iv) “may serve to undermine the SEC’s mission or could potentially prove to be a waste of the SEC staff’s time and resources.”
Evaluation of the Division of Corporation Finance’s Disclosure Review and Comment Letter Process
On 13 September, the SEC’s Office of Inspector General issued a report, “Evaluation of the Division of Corporation Finance’s Disclosure Review and Comment Letter Process.” The report examined the policies, procedures, and internal controls established by the SEC’s Division of Corporate Finance and provided “overall guidance for how staff should conduct disclosure reviews and for how information, including comments, should be documented, tracked, and disseminated to companies and the public.” The report indicated that the Division generally followed the policies and procedures established. But the report also found that: (i) “examiners and reviewers did not always properly document comments before issuing comment letters to companies”; (ii) “some case files were incomplete as of the date [the Division] issued a comment letter to a company”; and (iii) “examiners and reviewers inconsistently documented oral comments to companies.” To remedy these findings, the report recommended that the Division establish mechanisms and controls, including detailed guidance, to ensure these actions are taken.
CFTC & DERIVATIVES
Chairman Giancarlo Review of Implementation of Global Swaps Reforms
On 11 September, CFTC Chairman J. Christopher Giancarlo wrote an op-ed in a Paris financial daily newspaper titled, when translated, “Deference is the Path Forward in Cross-Border Supervision of CCPs.” In the op-ed, Chairman Giancarlo addresses the increase in central clearing of swaps at central counterparties (“CCPs”) and the “diverging regulatory views on how to effectively supervise these global CCPs.” Noting that the G-20 leaders committed to the “consistent implementation of global standards rather than identical implementation,” he stated that the “best route to ‘consistent implementation’ is through the mutual deference to comparable foreign regulatory frameworks.” In addition, he stated that the CFTC is looking to “incorporate deference into other parts of our regulatory framework and form stronger bilateral and multilateral alliances with other regulators.”
On 12 September, CFTC Chairman Giancarlo delivered a speech at the Global Forum for Derivatives Markets 38th Annual Bürgenstock Conference in Switzerland addressing: (i) global swaps reform; (ii) “cross-border clearinghouse supervision”; (iii) the CFTC’s “swaps reform version 2.0”; and (iv) “21stcentury market regulation.”
- Global Swaps Reform: Chairman Giancarlo reiterated his belief that “deference” rather than “regulatory uniformity” is the way to “build a cross-border regulatory relationship in the spirit of the Pittsburgh G-20 accords,” noting that the agreement on CCP equivalence reached by the CFTC and the European Commission in the spring of 2016 “signaled the ability of the U.S. and Europe to work together successfully on critical cross-border issues.”
- Cross-Border Clearinghouse Supervision: Noting that in June 2017, the European Commission proposed an amendment to the European Market Infrastructure Regulation (“EMIR”) “to regulate third-country CCPs, including a process to introduce a CCP location policy . . . following Brexit,” Chairman Giancarlo warned that he “would consider any unilateral change by EU authorities to the CFTC-EC Equivalence Agreement to be a violation of trust and cooperation between the U.S. and Europe.” He noted that “if the EU must reconsider its approach to cross-border supervision of systemically important CCPs, then we cannot have piecemeal and contradictory rulemaking.”
- CFTC’s Swaps Reform Version 2.0: Chairman Giancarlo explained that the CFTC “was the first to implement most of the G20 swaps reforms,” which he described as “Swaps Reform Version 1.0.” He stated that the CFTC now has four years of experience operating within this framework, which contains “some serious bugs and flaws, most critically its inhibition of robust trading liquidity, participant diversity and market vibrancy.” As such, he expressed his commitment to improving the framework by creating a “CFTC Swaps Reform Version 2.0,” which will be “engineered to better enhance market durability, increase trading liquidity and stimulate broad-based economic growth and revival.”
- 21st Century Market Regulation: Chairman Giancarlo highlighted the need to “keep abreast of the challenges of ever-changing markets and technologies,” citing the recently launched LabCFTC as an example of the CFTC “keep[ing] pace” with technology-driven market changes.
DOL FIDUCIARY DUTY RULE
Senator Warren’s Letters to Labor Secretary Acosta and SEC Chairman Clayton
On 5 September, Senator Elizabeth Warren (D-MA) sent letters to Labor Secretary Alexander Acostaand SEC Chairman Clayton warning them against delaying implementation of the Fiduciary Duty Rule. Senator Warren’s letter to Secretary Acosta notes that delaying the rule “would ignore the preparation and positive outlook on the rule that many financial services and insurance companies have repeatedly expressed” both to her and to the companies’ investors through earnings calls. In both her letters, Senator Warren highlights four reasons not to delay the Rule: (i) “companies are well-prepared for the rule's implementation”; (ii) “coming into compliance with the rule is not overly burdensome”; (iii) “the rule is consistent with their goals of putting their clients' interests first”; and (iv) “the Administration's previous delays have caused uncertainty for their companies, and further delays would only exacerbate this uncertainty.” In her letter to Secretary Acosta, she urges the DOL to “carefully consider these and other companies’ communications to their investors, as well as the changes to their inventories in response to the rule, in evaluating the rule's impact on the market for retirement investment products.”
Federal Reserve Request for Comments on Proposal to Produce new Reference Rates
On 24 August, the Board of Governors of the Federal Reserve System (“Board”) requested public comment on a notice regarding the Fed’s consideration of a proposal for the Federal Reserve Bank of New York to publish “three rates based on overnight repurchase agreement transactions on U.S. Treasury securities,” developed in coordination with the Office of Financial Research (“OFR”). The three different rates include: (i) the “Tri-party General Collateral Rate,” which would “measure the rate of return available on overnight repo transactions against Treasury securities in the tri-party repo market, excluding GCF Repo and transactions in which the Federal Reserve is a counterparty”; (ii) the “Broad General Collateral Rate,” which would “provide a broader measure of rates on overnight Treasury GC repo transactions”; and (iii) the “Secured Overnight Financing Rate,” which would “be the broadest measure of rates on overnight Treasury financing transactions by also including bilateral Treasury repo transactions cleared through FICC’s DVP service, filtered to remove some (but not all) transactions considered ‘specials.’” The proposal includes the methodologies that would be used to calculate the rates. The Board is seeking comments related to: (i) the usefulness of the proposed rates; (ii) the calculation of the rates, and the inclusion of “particular sources of data or data sets”; (ii) whether the “proposed time of publication [is] early enough to facilitate the use of the rates for various purposes”; (iv) whether the “use of the volume-weighted median is appropriate” and other alternatives to this proposal; and (v) whether the “proposed summary statistics would be useful to the market.” The notice was published in the Federal Register on 30 August, and the comment period will close on 30 October 2017.
UPCOMING EVENTS AND DEADLINES
o 22 September: Financial Stability Oversight Council executive session to discuss an update on the annual re-evaluation of the designation of a nonbank financial company and consideration of the Council’s 2018 budget.
o 23 October: CFTC Office of International Affairs 25th Annual Symposium