US Regulatory Update
Economic Growth, Regulatory Relief, and Consumer Protection Act
On 5 January, The Hill reported that White House National Economic Council Director Gary Cohn stated that the Economic Growth, Regulatory Relief, and Consumer Protection Act, S. 2155, would “pass the House ‘in the first quarter of this year.’” As explained by a section-by-section summary, the bill includes a variety of financial regulatory reform provisions, including raising the Dodd-Frank Act’s threshold for applying enhanced prudential standards for certain banking holding companies from $50 billion to $250 billion.
New York Proposes Best Interest Standard for Entities Licensed to Sell Life Insurance and Annuity Products
On 27 December 2017, the New York State Department of Financial Services (“NYDFS”) issued a proposed regulation that would establish a “best interest” standard for entities licensed to sell life insurance and annuity products in New York. The proposed regulation would require “insurers and insurance producers” to act in the “best interest” of a consumer when recommending a transaction, which would require them to, among other things, provide recommendations to the consumer that are “based on an evaluation of the suitability information of the consumer that reflects the care, skill, prudence, and diligence that a prudent person familiar with such matters would use under the circumstances without regard to the financial or other interests of the producer, insurer, or any other party.” As noted by the NYDFS in the accompanying press release, the proposed regulation is “aligned with recently delayed federal regulations relating to retirement savings” (referring to the Department of Labor’s (“DOL”) Fiduciary Duty Rule, the applicability of which has been delayed until 1 July 2019), but would apply “beyond the types of advice covered by the DOL Rule, including both in the specific context of retirement planning and when recommendations are made prior to the sale of an insurance product or after the sale but during the servicing of the product for the consumer.” The comment period closes on 26 February 2018.
SIFI AND FINANCIAL STABILITY
Federal Reserve Board Requests Comments on Proposed Guidance Clarifying its Supervisory Expectations Related to Risk Management for Large Financial Institutions
On 4 January, the Board of Governors of the Federal Reserve (“Board”) issued a request for comments on proposed guidance that would clarify Board supervisory expectations related to “core principles of effective senior management, the management of business lines, and independent risk management and controls for large financial institutions” (“LFIs”). The proposed guidance would apply to, among other entities, systemically important nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Board. Specifically, the proposed guidance aims to: (i) “distinguish the supervisory expectations for boards from those of senior management”; and (ii) “delineate the roles and responsibilities for various individuals and functions within an organization that are accountable for risk management, including a firm’s senior management, business line management, and independent risk management and audit function.” The comment period closes on 15 March 2018.
SEC & SECURITIES
SEC Requests Public Comments on Form PF
On 10 January, the SEC requested public comments on the use and necessity of the information collected by Form PF. The SEC noted that private fund advisers that manage at least $150 million in private fund assets must “report certain information regarding the private funds they advise on Form PF,” which is used by regulators, such as the SEC, Financial Stability Oversight Council and the CFTC, to monitor and examine nonbank financial companies and the private fund industry. The SEC is requesting comments on: (i) “whether the collection of information is necessary for the proper performance of the functions of the Commission, including whether the information has practical utility”; (ii) “the accuracy of the Commission's estimate of the burden of the collection of information”; (iii) “ways to enhance the quality, utility, and clarity of the information collected”; and (iv) “ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology.” The comment period closes on 11 March 2018.
SEC Requests Comments on Bitcoin Exchange-Traded Funds
On 28 December 2017 and 2 January 2018, the SEC requested public comments on two proposed rule changes filed by Cboe BZX Exchange, Inc. that would enable the exchange to list and trade Bitcoin exchange-traded funds (“ETFs”), available here and here. The comment period closes 21 days after the proposed rule changes are published in the Federal Register.
Fixed Income Market Structure Advisory Committee Meeting
On 11 January, the SEC’s Fixed Income Market Structure Advisory Committee held its inaugural meeting to discuss issues relating to bond market liquidity and certain administrative items. In his opening remarks, SEC Chairman Jay Clayton highlighted the importance of addressing issues relating to the fixed income markets due to: (i) the significant growth that the U.S. corporate bond and municipal bond markets industry have experienced in the past decade or so, which has “outpaced growth in U.S. equities” markets; (ii) the “significant impact” fixed income markets have on other markets; and (iii) the importance of “corporate and municipal debt markets . . . to retail investors . . . both directly and indirectly through pension funds and other pooled vehicles.” During the meeting, the participants discussed, among other things: (i) certain reports produced by Vanguard, Barclays, BlackRock, Citigroup, and AllianceBernstein related to corporate bonds and market liquidity for these instruments; (ii) measuring liquidity, with participants noting the difficulty in measuring liquidity due to its large range of characteristics, including “breadth, depth, immediacy, [and] price impact,” which can be measured using a number of different metrics; (iii) factors that impact liquidity during times of stress; (iv) the emergence of alternative liquidity providers; (v) whether and how the U.S. pre- and post-trade transparency model should be reviewed; and (vi) how the SEC can tailor policies and regulations to improve liquidity in the bond market.
- In his opening remarks, Chairman Clayton also stated that the SEC will not extend the charter of the Equity Market Structure Advisory Committee and instead will “organize targeted roundtables on discrete equity market structure issues” going forward.
CFTC & DERIVATIVES
CFTC Publishes Backgrounder on its Oversight of and Approach to Virtual Currency Futures Markets
On 4 January, the CFTC published a backgrounder on “its oversight of and approach to virtual currency futures markets.” The backgrounder addresses: (i) “federal oversight of and jurisdiction over virtual currencies”; (ii) the “CFTC’s approach to regulation of virtual currencies,” which involves “consumer education, asserting legal authority, market intelligence, robust enforcement, and government-wide coordination”; (iii) the “self-certification process generally, as well as specifically regarding the recent self-certification of new contracts for bitcoin futures products by designated contract markets (“DCMs”),” such as by the Cboe; (iv) “background on the CFTC’s ‘heightened review’ for virtual currency contracts”; and (v) “a discussion of the constituencies the CFTC believes could be impacted by virtual currency futures.” CFTC Chairman J. Christopher Giancarlo also issued a statement in the accompanying press release in which he: (i) summarized the matters discussed in the backgrounder; (ii) expressed his interest and support for the upcoming CFTC Technology Advisory Committee and Market Risk Advisory Committee meetings to be held in January 2018; (iii) reiterated the CFTC’s view that virtual currency is a “commodity” subject to the oversight of the CFTC; and (iv) emphasized the CFTC’s role in promoting “responsible innovation and development that is consistent with its statutory mission to enhance derivative trading markets and to prohibit fraud and manipulation in connection with commodities in interstate commerce.”
Senate Agricultural Committee Chair and Ranking Member Express Support for CFTC Position on Cross-Border Clearinghouse Regulation
On 8 January, Senate Committee on Agriculture, Nutrition, and Forestry Chairman Pat Roberts (R-KS) and Ranking Member Debbie Stabenow (D-MI) sent a letter to CFTC Chairman J. Christopher Giancarlo expressing their support for Chairman Giancarlo’s “efforts to ensure a universal solution that . . . encapsulates the principles set forth in the CFTC-EC [cross-border clearinghouse oversight] agreement.” Noting that the EC has proposed a “major overhaul of its financial services regulatory framework” in response to Brexit which would “threaten the 2016 CFTC-EC agreement,” the senators agreed with Chairman Giancarlo’s assessment that “any unilateral change by the European authorities would be a violation of trust and cooperation between the U.S. and Europe.” They also supported a review of the “appropriateness of the exemptions and relief [the CFTC] has granted to foreign entities, including clearinghouses established in the European Union” if “the EC moves away from the 2016 CFTC-EC agreement.”
- In response, Chairman Giancarlo issued a statement expressing gratitude for the support of the senators and emphasized the “critical importance” of ensuring continued adherence to the equivalence agreement and maintaining “supervisory deference” as the key principle to the cross-border governance of U.S and EU clearinghouses.
UPCOMING EVENTS AND DEADLINES
- 23 January: CFTC Technology Advisory Committee public meeting to discuss: (i) “the scope, plan, and approach for the Committee’s efforts in 2018”; (ii) “topics and issues involving financial technology in CFTC regulated markets”; and (iii) “work streams and/or subcommittee groups that can help generate actionable recommendations to the Commission on select issues.”
- 28 January: comments are due on FINRA’s request for comment on the effectiveness and efficiency of its rule on payments for market making.
- 30 January: Treasury Secretary Steven Mnuchin is scheduled to testify at a U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing titled “The Financial Stability Oversight Council Annual Report to Congress.”
- 31 January: CFTC Market Risk Advisory Committee public meeting to discuss the “statutory and regulatory process for the listing of new and novel products on CFTC-regulated designated contract markets (DCMs) and swap execution facilities (SEFs) through self-certification.”
- 6 February: SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo are scheduled to testify at a U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing titled “Virtual Currencies: The Oversight Role of the SEC and CFTC.”
- 26 February: comments are due on the New York State Department of Financial Services’ proposed regulation to establish a “best interest” standard for entities licensed to sell life insurance and annuity products.