US Regulatory Update
CIGFO Issues Annual Report
On 3 October, the Council of Inspectors General (“CIGFO”) issued its annual report, the purpose of which is to “consolidate and provide insight into cross-cutting management and performance challenges facing financial sector regulatory organizations as identified by members of [CIGFO].” The Dodd-Frank Act established CIGFO to oversee the Financial Stability Oversight Committee and suggest measures to improve financial oversight. The report focuses principally on six subjects: (i) enhancing oversight of financial institution cybersecurity; (ii) managing and securing information technology at regulatory organizations; (iii) sharing threat information; (iv) readiness for crises; (v) strengthening agency governance; and (vi) managing human capital.
Judge Kavanaugh Confirmed and Sworn in as 114th Supreme Court Justice
On 6 October, the U.S. Senate, by a vote of 50-48, confirmed D.C. Circuit Court Judge Brett Kavanaugh to become the 114th Supreme Court justice in U.S. history. Justice Kavanaugh was sworn in by Chief Justice John Roberts later that day.
Senate Banking Committee Hearing on the Implementation of EGRRCPA
On 2 October, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act [‘EGRRCPA’].” Testifying at the hearing were: Joseph Otting, Comptroller of the Office of the Comptroller of the Currency (“OCC”); Randal Quarles, Vice Chairman of the Federal Reserve (“Fed”); Jelena McWilliams, Chairman of the Federal Deposit Insurance Corporation (“FDIC”); and J. Mark McWatters, Chairman of the National Credit Union Administration (“NCUA”). Regarding the Volcker Rule, Committee Chairman Mike Crapo (R-ID) urged regulators to use their discretion to either revise the definition of a “covered fund” or include exclusions to address the “overly-broad application” to venture capital, loan creation, and other long-term investments. Senator Mike Rounds (R-SD) asked Mr. Quarles what the thought process is for the Fed while they are reviewing the supplemental leverage ratio. Quarles replied that in regard to the capital framework, liquidity rules, and special stress testing requirements, the Fed will consider whether the globally systemically important banking organization (“GSIB”) surcharge has been appropriately calibrated to protect the stability of the financial sector and promote safety and soundness within the system. When asked about the Fed’s stress tests, Quarles noted that the notice of proposed rulemaking on the tailoring of supervisory stress tests is one of the highest priorities at the Fed and that he expects the rulemaking to be completed “very soon, before the end of the year.” When asked about their views on the Community Reinvestment Act (“CRA”), Ms. McWilliams and Mr. Otting agreed that both the FDIC and OCC have systems in place to detect discrimination. When asked about the status of the community banking leverage ratio, Ms. McWilliams said a notice of proposed rulemaking is expected “very soon.”
Senate Banking Committee Republicans Send Letter to Agencies Regarding Volcker Rule
On 1 October, seven Republican members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs sent a letter to the Department of the Treasury, Fed, Securities and Exchange Commission (“SEC”), OCC, FDIC, and Commodities Futures Trading Commission (“CFTC”) regarding those agencies’ joint proposal to modify regulations implementing the Volcker Rule. The committee members wrote that “[a]lthough the [EGRRCPA] helped to address the impact of the Volcker Rule on smaller entities, many… issues remain outstanding.” Those issues include “questions around which entities and activities are covered, the impact to market liquidity, coordination of supervision and enforcement, and the collateral damage to smaller entities.” The letter urged the agencies to “reexamine all aspects of the Volcker Rule’s implementation” as the agencies consider comments on the proposed rule, including the Volcker Rule’s “covered funds” provisions.
The Senate Committee on Banking, Housing, and Urban Affairs’ hearing entitled “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform,” which was originally scheduled for 4 October, has been postponed to a date to be determined.
SEC & Securities
SEC Commissioner Peirce Speaks on Digital Assets and Arbitration
On 24 September, SEC Commissioner Hester Peirce delivered remarks before the University of Michigan School of Law in a speech entitled “Wolves and Wolverines.” In her speech, Commissioner Peirce noted the recent “fascination” from market participants regarding arbitration between public companies and their shareholders. She pointed out that the Federal Arbitration Act “directs federal agencies to respect private contracts that favor arbitration.” As a result, the law could “limit the SEC’s ability to override an arbitration clause that comports with state law” if “corporate charters and bylaws are contracts.” Additionally, Peirce pointed out that the SEC staff “has in the past effectively refused to allow domestic companies’ registration statements to go effective with a mandatory arbitration clause in its charter.” She said that she does not “understand the basis for the staff’s position, which has been couched in broad public interest language.” Peirce stated that she wants to understand the “legal basis underlying the [staff’s] recommendation” if they were to make a similar recommendation to the Commission in the future. Peirce also reiterated her dissenting opinion in the Commission’s recent decision to deny the application of an exchange-traded product tied to Bitcoin. She warned that by denying the application and effectively “mak[ing] decisions for investors in order that they will not hurt themselves,” the SEC may have created a climate where investors may assume that securities which pass the SEC’s regulatory scrutiny are “all good investments without conducting further research.”
FINRA to Consolidate Examination and Risk Monitoring Program
On 1 October, the Financial Industry Regulatory Authority (“FINRA”) announced it plans to consolidate its Examination and Risk Monitoring Programs by integrating the three separate programs into a single, unified program “to drive more effective oversight and greater consistency, eliminate duplication and create a single point of accountability for the examination of firms.” The consolidation is expected to continue through 2019.
FINRA CEO Cook Says FINRA May Kill Suitability Rule if Regulation Best Interest Finalized
On 2 October, Think Advisor reported that FINRA CEO Robert Cook said FINRA may do away with its suitability rule if the SEC’s Regulation Best Interest is finalized. The remarks were made at the Securities Industry and Financial Markets Association’s Annual Meeting, and Cook said, “If Reg BI is adopted, then we need to look at our rule set to determine if any changes are appropriate.” FINRA’s actions will depend on what Regulation Best Interest “looks like and how it turns out.”
SEC Co-Director Peikin Remarks on SEC Enforcement Actions
On 3 October, the SEC’s Division of Enforcement Co-Director Steven Peikin delivered remarks before the PLI White collar Crime 2018 Persecutors and Regulators Speaks conference in a speech entitled “Remedies and Relief in SEC Enforcement Actions.” In his speech, Peikin recommended that the Division of Enforcement consider the efficacy of both monetary and non-monetary penalties on a “case-specific” basis because non-monetary relief can be just as effective in achieving the SEC’s enforcement goals. He also noted that while civil penalties can “attract headlines” and serve as a strong deterrent, these measures are not always warranted if remedial efforts are taken. Non-monetary penalties, such as repayments or the implementation of enhanced accounting controls, can in some cases better serve the Commission’s investor protection goals by requiring stronger corporate governance. He pointed to the recent Tesla settlement, which required the company to take affirmative steps to come into and remain in compliance, as an example of benefits that can be derived from non-monetary penalties.
SEC Chairman Clayton and Delaware Chief Justice Strine Participate in Corporate Governance Discussion
On 4 October, SEC Chairman Jay Clayton and Delaware Chief Justice Leo E. Strine Jr. participated in a discussion at the University of Pennsylvania Law School’s Institute for Law and Economics (“ILE”) entitled “Orientating Corporate Governance to Generate Sustainable Growth: A Cooperative Discussion on Common Ground and Forging a Path Forward.” Professor Lawrence A. Hamermesh, Executive Director at the ILE and Emeritus Professor at the Widener University Delaware Law School, moderated the discussion. The discussion began with a conversation on the current shareholder voting system. Hamermesh asked whether the current practice of voting on executive compensation (i.e. say-on-pay) on an annual basis is appropriate. Strine argued that executive compensation should not be something that is voted on annually, but rather it should only be voted on every three to four years. Clayton argued that in order to improve the system we need to understand the reality that the corporate governance process, including shareholder engagement, is “fundamentally different” today than it was fifteen years ago. Chief Justice Strine expressed concern about the separation of individual stockholders from key decisions regarding the use and voting of their shares with the rise of institutional investors. Particularly, he was concerned with how fund managers investing aggregated funds from individuals were voting shares without regard to the interests or politics of the individuals who actually own those shares. Clayton said the SEC is working on ways to address the voting and ownership divide and agreed that the current system has created a disconnect between stockholder interest and those of the institutional funds that often exercise the stockholder votes and influence corporate decisions.
CFTC & Derivatives
Federal Court Finds That Virtual Currencies are Commodities
On 26 September, Senior Judge Rya W. Zobel of the U.S. District Court for the District of Massachusetts entered a memorandum of decision holding that the CFTC has the power to prosecute fraud involving virtual currencies and denying the defendants’ motion to dismiss. The Court held that the CFTC had sufficiently alleged that the virtual currency at issue, My Big Coin, was a commodity under the Commodity Exchange Act because the CFTC alleged that MBC “is a virtual currency and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin).”
CFTC Releases Cross-Border White Paper
On 1 October, CFTC Commissioner Christopher Giancarlo announced the release of a white paper entitled “Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation.” The white paper “intends to direct the CFTC staff to put forth new rule proposals to address a range of cross-border issues in swaps reform.” The white paper identifies a number of adverse consequences of the CFTC’s cross-border approach, including: (i) “[i]t is expressed in ‘guidance’ rather than formal regulation subject to the Administrative Procedure Act”; (ii) “[i]t is over-expansive, unduly complex, and operationally impractical, increasing transaction costs and reducing economic growth and opportunity”; (iii) “[i]t relies on a substituted compliance regime that encourages a somewhat arbitrary, rule-by-rule comparison of CFTC and non-U.S. rules under which a transaction or entity may be subject to a patchwork of CFTC and non-U.S. regulations”; and (iv) “[i]t shows insufficient deference to non-U.S. regulators that have adopted comparable G20 swaps reforms and is inconsistent with the CFTC’s longstanding approach of showing comity to competent non-U.S. regulators in the regulation of futures.” The white paper also recommends the following changes to the CFTC’s cross-border approach, including:
· “[e]xpand the use of the CFTC’s exemptive authority for non-U.S. CCPs [central clearing parties] that are subject to comparable regulation”;
· “[e]nd the current bifurcation of the global swaps markets”;
· “[r]equire registration of non-U.S. swaps dealers whose swap dealing activity poses a ‘direct and significant’ risk to the U.S. financial system”;
· “[a]dopt an approach that permits non-U.S. person to rely on substituted compliance with respect to the swap clearing and trade execution in Comparable Jurisdictions”; and
· “[t]ake a territorial approach to U.S. swaps trading activity.”
CFTC Commissioner Giancarlo Speaks on Regulatory Enforcement and Healthy Markets
On 2 October, CFTC Commissioner Christopher Giancarlo delivered remarks before the Economic Club of Minnesota in a speech entitled “Regulatory Enforcement & Healthy Markets: Perfect Together!” The overarching purpose of Giancarlo’s speech was to highlight developments in the CFTC’s enforcement program. Giancarlo said regulatory enforcement “is a priority and a bipartisan one,” and that “there will be no pause, no let up, and no relaxation” in the CFTC’s efforts to enforce the law and punish wrongdoing. He outlined several priorities of the CFTC’s enforcement program, including: (i) combating manipulative conduct because it is one of the CFTC’s “principal responsibilities” as a regulator to “ensure that the price discovery process is sound”; (ii) increasing coordination with criminal authorities and other regulators; (iii) seeking accountability from individuals who engage in wrongdoing because “[i]ndividual accountability ensures that the person committing the illegal act is held responsible and punished”; and (iv) continuing to “incentivize more whistleblowers to come forward.”
CFTC Commissioner Behnam Announces the Establishment of a New Subcommittee of the Market Risk Advisory Committee
On 3 October, CFTC Commissioner Rostin Behnam announced that the Commission had voted to create the Interest Rate Benchmark Reform Subcommittee under the CFTC’s Market Risk Advisory Committee (“MRAC”). Behnam established the Subcommittee “to provide reports and recommendations to the MRAC regarding ongoing efforts to transition U.S. dollar derivatives and related contracts to a risk-free reference rate (RFR) -- the Secured Overnight Financing Rate (SOFR) -- and the impact of such transition on the derivatives markets.” Commissioner Behnam is seeking nominations for Subcommittee members through formal request in the Federal Register. Nominations are due by 16 October.
CFTC and ASIC Sign FinTech Cooperation Agreement
On 4 October, the CFTC and the Australian Securities and Investment Commission (“ASIC”) announced they had signed an arrangement “to cooperate and support innovation” through each agencies’ respective financial technology (“FinTech”) initiatives. The agreement focuses on information sharing on FinTech market trends and developments -- specifically, the sharing of insights from the CFTC and ASIC’s relevant FinTech sandbox, proofs of concept, and innovation competitions. The agreement also helps facilitate referrals of FinTech companies seeking to enter the U.S. or Australian markets. The goal of this agreement is to help companies better navigate and understand each markets’ regulatory regimes and capitalize on opportunities.
Federal Reserve Bank of New York Releases First Liberty Street Economics Studies
On 1 October, the Federal Reserve Bank of New York released, as part of its Liberty Street Economics program, the first parts of a thirteen-part series entitled “The Effects of Post-Crisis Banking Reforms.” The released parts study: (i) regulatory changes and the cost of capital for banks; (ii) “too big to fail” issues; (iii) the cost of regulatory capital; and (iv) changing risk-return profiles.
Fed Chairman Powell Speaks on Monetary Policy and Risk Management
On 2 October, Fed Chairman Jerome Powell delivered remarks before the 60th Annual Meeting of the National Association of Business Economics in a speech entitled “Monetary Policy and Risk Management at a Time of Low Inflation and Low Unemployment.” Chairman Powell said that he does not see signs of inflation spiking despite the low unemployment rate. Specifically, he said, “[m]any factors, including better conduct of monetary policy over the past few decades, have greatly reduced…the effects that tight labor markets have on inflation.” Powell believes that the Fed’s two percent inflation target policy has kept the Phillips curve -- a standard central bank theory that posits that tight labor markets lead to higher inflation -- “flat” because people do not expect higher inflation with the Fed has shown it will be aggressive to keep prices rising above two percent. He also said the economy appears to be operating “with limited slack,” and he defended the Fed’s approach of raising short-term interest rates gradually because raising rates too fast “could needlessly foreshorten the expansion.”
Fed Seeks Comments on Ways to Support Faster Payments in the U.S.
On 3 October, the Fed released a request for comments on “potential actions that the [Fed] could take to promote ubiquitous, safe, and efficient faster payments in the United States by facilitating real-time interbank settlement of faster payments.” As an example of faster payment services, the Fed pointed to mobile phone apps that allow on-the-spot payments. The Fed noted that one potential action would be the Fed’s “developing a service of 24x7x365 real-time interbank settlement of faster payments. Comments are due by 14 December 2018.”
Fed Governor Brainard Delivers Remarks on Supporting Fast Payments
On 3 October, Fed Governor Lael Brainard delivered remarks before the Fed Payment Improvement Community Forum in a speech entitled “Supporting Fast Payments for All.” Brainard said that even as consumers continue to conduct commerce and pay with a simple “keystroke, swipe, or tap,” the Fed’s payment infrastructure could use a bit of modernization in a bid to support fast payments “for all.” She pointed out that while “we are seeing a growing demand for payments to be as instantaneous as the apps on our smartphones,” the “patchwork” of systems that payments rely on can lead to inefficiencies and delays sometimes resulting in uneven access. Brainard said the U.S. payment system stands “again, at a crossroads” because there is a disconnect between the underlying settlement abilities of the payment systems and user expectations of speed and accessibility.
· 10 Oct: FDIC will hold a meeting of its Advisory Committee on Community Banking to discuss local banking conditions.
· 10 Oct: Senate Committee on Commerce, Science, and Transportation hearing entitled “Consumer Data Privacy: Examining Lessons From the European Union’s General Data Protection Regulation and the California Consumer Privacy Act.”
· 10 Oct: Comments due for Bureau of Consumer Financial Protection’s (“BCFP”) proposed rule regarding trial disclosure programs.
· 11 Oct: Senate Banking Committee hearing entitled “Exploring the Cryptocurrency and Blockchain Ecosystem.”
· 11 Oct: SEC will hold an open meeting to consider whether to reopen the comment period and request additional comment regarding: (i) capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants, and amendments to Rule 15c3-1 for broker-dealers proposed in October 2012; (ii) amendments proposed in May 2013 that would establish the cross-border treatment of security-based swap capital, margin, and segregation requirements; and (iii) an amendment proposed in April 2014 that would establish an additional capital requirement for security-based swap dealers that do not have a prudential regulator.
· 12 Oct: FDIC will hold its Annual Consumer Research Symposium.
· 12 Oct: Comments due for BCFP’s proposed rule providing limited exemptions for certain non-U.S. clearing organizations from registration as derivatives clearing organizations.