US Regulatory Update
Treasury Releases Interim Regulations for FIRRMA Pilot Program
On 10 October, the Department of the Treasury (“Treasury”) announced the release of interim regulations for its Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) pilot program. The Treasury, as chair of the Committee on Foreign Investment in the United States (“CFIUS”), issued the interim regulations “to protect critical American technology and intellectual property from potentially harmful foreign acquisitions.” FIRRMA authorizes CFIUS to conduct pilot programs to implement provisions in the legislation that did not become effective immediately upon enactment. The pilot program, among other things, “implements authorities that expand the scope of transactions subject to CFIUS review to include certain non-controlling investments in U.S. businesses involved in critical technologies related to specific industries.” The pilot program will begin on 30 November 2018, 30 days following its publication in the Federal Register. The program will end no later than the date on which the final FIRRMA regulations are fully implemented.
Treasury Secretary Mnuchin Delivers Remarks at the IMFC
On 11 October, Treasury Secretary Steven Mnuchin delivered remarks at the International Monetary Fund Conference (“IMFC”) to discuss global economic developments. Secretary Mnuchin noted that strong U.S. growth “has been a key contributor to the current global economic expansion” and that the U.S. “is set to exhibit strong growth in the year as a whole and maintain its momentum going forward.” Mnuchin praised the recent U.S. tax cuts, saying they have “accelerated business fixed investment.” He believes that “regulatory relief and other pro-growth initiatives will further improve the business climate” and that “structural reforms will lift the U.S. economy to a higher sustained growth path.” However, Mnuchin warned that further global trade and current account imbalances “can impede future grown and threaten financial stability.” He said that U.S. “encourage[s] the IMF to clearly indicate where its members continue to employ macroeconomic, foreign exchange, and trade policies that contribute to unfair competitive advantages” because “[t]he IMF plays a critical role in advising, informing, and helping member countries achieve global economic stability and strong and balance growth.”
Federal Reserve Bank of New York Releases Second Tranche of Liberty Street Economics Studies
On 9-12 October, the Federal Reserve Bank of New York released, as part of its Liberty Street Economics program, parts six through nine of a thirteen-part series entitled “The Effects of Post-Crisis Banking Reforms.” The released parts study: (i) the effects of oversight by Bureau of Consumer Financial Protection on the supply of mortgage credit; (ii) reasons why banks target return on equity instead of earnings per share; (iii) the effects of a recent regulatory change that ties regulatory capital directly to the market value of the securities portfolios for some banks; and (iv) leverage rule arbitrage.
Senate Commerce Committee Hearing on Data Protection
On 10 October, the U.S. Senate Committee on Commerce, Science, and Transportation held a hearing entitled “Consumer Data Privacy: Examining Lessons From the European Union’s General Data Protection Regulation and the California Consumer Privacy Act.” Testifying at the hearing were: Andrea Jelinek, Chair of the European Data Protection Board; Alastair Mactaggart, Chair of the Board at Californians for Consumer Privacy; Laura Moy, Executive Director and Adjunct Professor of Law at the Georgetown Law Center on Privacy and Technology; and Nuala O’Connor, President and CEO of the Center for Democracy and Technology. Senator Maggie Hassan (D-NH) and Senator Amy Klobuchar (D-MN) asked the panel about the data breach notification requirements under the European Union’s General Data Protection Regulation. Jelinek said that companies must notify the regulator within 72 hours of a data breach and that the first notification does not have to provide all the details of the breach since companies need time to gather all the details of a breach. Committee Ranking Member Ed Markey (D-MA) asked the panel if they believe companies should only collect information that is essential. Moy said she believes companies should only collect information necessary to provide the service. When asked about regulatory preemption of data privacy laws, O’Connor said that a patchwork of regulations would create uncertainty in the marketplace and that the U.S. needs to show leadership on this issue because it is important for the U.S.’s global standing.
Senate Banking Committee Hearing on Cryptocurrency and Blockchain
On 11 October, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Exploring the Cryptocurrency and Blockchain Ecosystem.” Testifying at the hearing were: Nouriel Roubini, Professor of Economics and International Business at the New York University Stern School of Business, and Peter Van Valkenburgh, Director of Research at Coin Center. In his opening statement, Roubini said, “Crypto is the mother and father of all scams…[and] blockchain is the most overhyped technology ever and is no better than a glorified database.” Van Valkenburgh, however, said that while cryptocurrencies and blockchain are not perfect, they are a significant step in improving the financial situation for many people. Regarding the use of blockchain, Roubini argued that banks and corporations are unlikely to use decentralized ledgers because those organizations cannot maintain full control of the systems. However, Van Valkenburgh said the distributed ledger could provide consumers with heightened security in light of the recent Equifax breach that caused “roughly half of all Americans, 143 million people, [to have] their Social Security numbers stolen.” Van Valkenburgh concluded that although blockchain “is not yet ready to answer all of [the] problems [facing the financial services industry] it is our best hope, and as with the Internet in the 90s, we need light-touch pro-innovation policy to ensure that these innovations flourish in America for the benefit and security of all Americans."
As of 12 October, the U.S. Senate and the U.S. House of Representatives are in recess until after the mid-term elections, which take place on 6 November 2018.
SEC & Securities
SEC Commissioner Peirce Advocates for Flexible Regulations
On 2 October, Securities and Exchange Commission (“SEC”) Commissioner Hester Peirce delivered remarks before the Financial Planning Association 2018 Major Firms Symposium in a speech entitled “Pickups and Put Downs.” In her speech, Commissioner Peirce advocated for a flexible regulatory approach that allows firms to experiment with new technologies and gives investors a wider selection of investment choices. Peirce said the SEC can “facilitate fund adaption of technological and other innovations" for the benefit of investors by changing its approach to individual products and practices by providing firms the flexibility to utilize new products, technologies, methods for disclosure, and fee structures. To ensure investors are capable of assessing new technological innovations, Peirce said the SEC must ensure that disclosures are written clearly. She urged the SEC to consider “shorter document[ation] that contains only key information.”
SEC Commissioner Peirce Speaks on Implementing the SEC’s Security-Based Swaps Rules
On 4 October, SEC Commissioner Hester Peirce delivered remarks before the 2018 ISDA Annual North America Conference in a speech entitled “Why and Whither Title VII?” Peirce said the SEC should act “expeditiously” to finalize the rules needed to trigger the registration of security-based swaps dealers (“SBSD”). Commissioner Peirce described four “core principles” the SEC must consider as it implements Title VII rules: (i) “our rules must effectively and efficiently advance the objectives of the Dodd-Frank Act,” in which “Congress directed, among other things, that security-based swap dealers be subject to a comprehensive regulatory framework”; (ii) “the Commission needs to articulate clear rules and provide its own guidance rather than relying on subsequent staff no-action letters or other staff-level guidance to make the regime workable”; (iii) the SEC “need[s] to account for the challenges that market participants will face as they come into compliance with an entirely new, comprehensive, and extremely complicated regulatory regime”; and (iv) “we need to consider with care the effect of our regulations outside the United States.”
Exchange Operators Call for Recusal of SEC Redfearn from Market Data Fee Lawsuit
On 4 October, the NYSE Arca, Inc. and Nasdaq Stock Market LLC (the “Exchanges”) filed a motion requesting the recusal of SEC Division of Trading and Markets Director Brett Redfearn from the SEC’s review of a dispute regarding market data fee increases. The motion is part of a dispute between the Securities Industry and Financial Markets Association (“SIFMA”) and the Exchanges, in which SIFMA has alleged that the Exchanges were not justified in levying fee increases for proprietary equity market data because of a lack of competition. The Exchanges request Director Redfearn’s recusal because before joining the SEC, he was a SIFMA member representative.
SEC Updates Compliance and Disclosure Guidance for Exchange Act Forms
On 5 October, the SEC updated its Compliance and Disclosure Interpretations to remind issuers that the revised disclosure requirements in Securities Act Release No. 33-10532 regarding shareholders’ equity go into effect on 5 November 2018. In Question 105.09, the SEC staff stated that it would not object to changes in shareholders’ equity made by the filer if the changes are included in Form 10-Q for the first quarter that begins after the effective date of the amendments. Securities Act Release No. 33-10532 amended the disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, U.S. Generally Accepted Accounting Principles, or changes in the information environment.
FINRA Board of Governors Release September Meeting Update
On 5 October, the Financial Industry Regulatory Authority’s (“FINRA”) Board of Governors released an update about its September 2018 meeting. At the meeting, the following rulemaking items were approved: (i) proposed amendment to expand time for non-parties to respond in arbitration; (ii) expansion of the Trade Reporting and Compliance Engine (“TRACE”) to include foreign sovereign debt securities; (iii) potential amendments to margin requirements for covered agency transactions; and (iv) proposed amendments to FINRA’s margin rule to clarify the treatment of “when issued” and other extended settlement transactions.
SEC Commissioner Jackson and Former U.S. Attorney Bharara Write Op-Ed on Insider Trading Reform
On 9 October, the New York Times published an op-ed written by SEC Commissioner Robert Jackson and former U.S. Attorney for the Southern District of New York Preet Bharara entitled “Insider Trading Laws Haven’t Kept Up With the Crooks.” In the article, Jackson and Bharara argue that the SEC should use its authority to clarify the U.S.’s outdated insider trading laws. The authors claim that the “government brings insider trading cases under a Depression-era law that generally prohibits ‘fraud’ in securities markets’” and that ”[a]s a result, what we now understand as the laws against insider trading have been written by federal judges in their decisions interpreting a statute that never mentions the words ‘insider trading.’” Jackson and Bharara also announced the formation of the Bharara Task Force on Insider Trading, which will consist of eight former regulators, judges, prosecutors, academics, and defense lawyers to develop proposals to update insider trading law.
SEC Chairman Jay Clayton Comments on Quarterly Reporting
On 11 October, the Wall Street Journal reported that SEC Chairman Jay Clayton said the SEC may look into the idea of smaller firms moving to six-month reporting, but regarding larger firms, he said, “I don’t think quarterly reporting is going to change for our top names anytime soon.” Speaking at the Bipartisan Policy Center’s event entitled “Reference Rate Reform: Impact on the Economy and Consumers,” Chairman Clayton pointed out that quarterly earnings are not “the sole driving factor” for some companies’ short-term focus and the SEC needs to ask itself first, “What does the market expect?” Clayton said there “may be” a class of smaller firms that would make sense to move away from quarterly reporting, but he has no plans to “move in any quick direction.” After the event, Clayton told reporters that many investors seem content with the current quarterly reporting system and that less frequent disclosure could be jarring.
SEC Votes to Reopen Comment Period for Capital, Margin, and Segregation Requirements at Open Meeting
On 11 October, at an open meeting the SEC voted to reopen the comment period and request additional comment on the proposed rules and amendments for capital, margin, and segregation requirements for security-based swap dealers and majority security-based swap participants and capital requirements for broker-dealers. The Commission said it said it is seeking comment on all aspects of the proposals and is also seeking specific comment in certain areas, including:
· the potential use by a nonbank SBSD of a credit risk charge for uncollected margin under the proposed capital rules for counterparties other than commercial end users, and whether a threshold should apply;
· the potential use of a risk-based margin threshold under which a nonbank SBSD need not collect initial margin;
· potential alternatives relating to exceptions for dealers under the proposed margin rule;
· the potential portfolio margining of swaps and security-based swaps;
· clarifications regarding the application of the proposed omnibus segregation requirements, as well as the cross-border application of the proposed segregation requirements; and
· the economic implications of the proposed rules, including solicitation of comment and supporting data on the current risk management practices that support trading activity in security-based swaps, as well as on how the baseline of the economic analyses has changed since the publication of the proposals.
Comments are due 30 days after the release announcing the reopening is published in the Federal Register.
SEC Announces New Strategic Plan
On 11 October, the SEC announced a new strategic plan “to guide the agency’s work over the next four years with a primary focus on investors, innovation and performance.” The strategic plan consists of three goals: (i) “[f]ocus on the long-term interests of our Main Street investors”; (ii) [r]ecognize significant developments and trends in our evolving capital markets and adjust our efforts to ensure we are effectively allocating our resources”; and (iii) “[e]levate the SEC’s performance by enhancing our analytical capabilities and human capital development.”
CFTC & Derivatives
CFTC Proposes Streamline Regulations for Commodity Pool Operators and Commodity Trading Advisors
On 9 October, the Commodity Futures Trading Commission (“CFTC”) announced that it had unanimously approved proposed rules as part of its KISS (“Keep It Simple Stupid”) Initiative to simplify regulations for commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”). The proposed rules would “simplify the regulatory obligations for CPOs and CTAs by codifying long-standing staff advisories and no-action letter relief in the Part 4 regulations.” The proposed rules, among other things, would also enhance consumer protection and boost confidence in the commodity markets by “banning individuals who are legally disqualified to operate investment pools from doing so.” In a statement on the proposed rules, CFTC Chairman Christopher Giancarlo said, “[T]his proposal appropriately tailors regulation and codifies decades-old no action relief in line with the goals of the CFTC’s Project KISS. I expect this proposal to be the first in a series of staff recommendations to streamline and simplify regulation of commodity pool operators and commodity trading advisors.” Comments on the proposed rules are due 60 days after their publication in the Federal Register.
CFTC Commissioner Behnam Speaks on Reference Rate Reform
On 11 October, CFTC Commissioner Rostin Behnam delivered remarks before the Bipartisan Policy Center in a speech entitled “Reference Rate Reform: Impact on the Economy and Consumers.” Commissioner Behnam pointed out that the CFTC “has been at the forefront of the global effort to eliminate fraud and manipulation within the rate setting process,” and that the CFTC recently approved his effort to establish the “Interest Rate Benchmark Reform Subcommittee to provide reports and recommendations to the MRAC [Market Risk Advisory Committee], regarding ongoing efforts to transition the U.S. dollar derivatives and related contracts to SOFR [Secured Overnight Financing Rate], and the impact of such transition on the derivatives markets.” Behnam said his goal for the subcommittee is to use it to help identify “the risks for financial markets and American consumers” within the derivatives space. Behnam closed by stating that he is “determined to work, within the context of reference rate reform, to help rebuild trust by shedding light on the importance of reference rates to consumers, and facilitating an inclusive, bipartisan conversation to resolve issues related to derivatives markets.”
· Oct. 15: SEC will hold an Industry and Professional Acquisition Support Service Industry Day to, among other things, “[f]oster [the] exchange of ideas and best practice in order to get the best possible solution to meet the Government contractual requirements.”
· Oct. 16: CFTC Commissioner Quintenz to speak at the 38th Annual GITEX Technology Week in Dubai.
· Oct. 16: Financial Stability Oversight Council Open Meeting.
· Oct. 17: CFTC Chairman Christopher Giancarlo to speak at the 34th Annual FIA Futures and Options Expo.
· Oct. 17: Comments due on the Fed Reserve, Federal Deposit Insurance Corporation, SEC, CFTC, Treasury, and Office of the Comptroller of the Currency’s proposed revision to prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds.
· Oct. 18: CFTC Commissioner Dan Berkovitz to participate in a fireside chat at the 34th Annual FIA Futures and Options Expo.
· Oct. 18: CFTC Commissioner Brian Quintenz to participate in a panel discussion at the 34th Annual FIA Futures and Options Expo.