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US Regulatory Update

U.S. Congress

House Financial Services Subcommittee Hearing on Oversight of the SEC’s Division of Investment Management

On 26 September, the House Committee on Financial Services’ Subcommittee on Capital Markets, Securities, and Investments held a hearing entitled “Oversight of the SEC’s Division of Investment Management.”  Dalia Blass, the Securities and Exchange Commission’s (“SEC”) Director of the Division of Investment Management, testified at the hearing.  Both Republicans and Democrats asked Ms. Blass about the SEC’s recent decision to rescind its 2004 no-action letters regarding proxy advisory firms.  Representative Bill Huizenga (R-MI) asked how this decision will assist investors and reduce proxy advisory conflicts of interests.  Ms. Blass said the Commission wants to encourage debate at the 15 November roundtable on the proxy process, and she pointed out that the underlying rules surrounding proxy voting have not changed as a result of the rescinding of the letters.  Representative Carolyn Maloney (D-NY) criticized the SEC’s decision to rescind the letters and asked what industry developments since 2004 compelled the action.  Ms. Blass responded that the regulatory landscape has changed since 2004, passive investing has grown, and the rise of data analytical tools has changed the voting strategies of portfolio managers.  Regarding exchange-traded funds (“ETFs”), Representative French Hill (R-AR) asked when the SEC’s ETF rules would be finalized.  Ms. Blass noted that the comment period for those rules ended in July 2018 and that the Commission is working to finalize those rules.  Representative Randy Hultgren (R-IL) asked how the SEC plans to incorporate the comments it received regarding Regulation Best Interest, and Ms. Blass said the SEC is currently considering the thousands of comments it has received, 

House Financial Services Subcommittee Hearing on the Goals of Sanctions

On 26 September, the House Committee on Financial Services’ Subcommittee on Monetary Policy and Trade held a hearing entitled “Administration Goals for Major Sanctions Programs.”  Marshall Billingslea, Assistant Secretary for Terrorist Financing at the U.S. Department of the Treasury, provided testimony for the hearing.  Addressing the threats of Iran, Russia, and North Kores, Mr, Billingslea said that “[e]ach of these countries poses its own particular challenge to the United States, our allies, and the international order, yet there are common threads linking them together,” and that ”we must closely examine and take into account each country’s distinct economic characteristics in addition to our broader foreign policy and national security objectives to ensure that the financial impact we seek is achieved.”  Billingslea also said that if Russia does not stop its “hostile behavior” on the world stage, then the U.S. administration will force sanctions against the responsible parties.  Regarding North Korea, the consensus was that the U.S. should maintain maximum sanction pressure on North Korea and its “enablers” until they demonstrate they are serious about denuclearization.

House Financial Services Committee Hearing on GSEs

On 27 September, the House Committee on Financial Services held a hearing entitled “Oversight of the Federal Housing Finance Agency’s [“FHFA”]role as conservator and regulator of the Government Sponsored Enterprises [“GSEs”].”  Testifying at the hearing were: Simone Grimes, Special Advisor at the FHFA ; Laura Wertheimer, Inspector General at the FHFA; Melvin Watt, Director at the FHFA; Timothy Mayopoulos, Chief Executive Officer at the Federal National Mortgage Corporation; and Donald Layton, Chief Executive Officer at the Federal Home Loan Mortgage Corporation.  Chairman Jeb Hensarling (R-TX) criticized how the government continues “to entrust almost all of housing finance to two GSE’s  and one unelected, unaccountable individual with omnipotent powers,” and he reiterated the “dire need” for housing finance reform.  Mr. Watt said that the conservatorship of GSEs is “not sustainable” and that “it remains absolutely essential for Congress and the Administration to enact housing finance reform legislations.”  Mr. Layton outlined serval elements to help the housing finance system “function smoothly while minimizing both costs for the borrowing public and risk for taxpayers,” including, among other things: (i) “strong, modernized and SIFI-consistent risk-based minimum regulatory capital requirements”; (ii) a “functioning common securitization platform supporting a single security”; and (iii) credit risk transfer “based upon sound economics and risk management, rather than non-economic statutory requirements.” 

House Financial Services Subcommittee Hearing on Financial Markets in the Digital Era

On 28 September, the House Committee on Financial Services’ Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Examining Opportunities for Financial Markets in the Digital Era.”  The purpose of the hearing was to (i) expand on the recommendations of the Department of Treasury’s July 2018 report titled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation” and (ii) “examine the current regulatory landscape, including the need to amend or modernize the regulatory framework or develop new legislative proposals that would allow financial services entities to use FinTech to deliver new products and services to consumers.”  Testifying at the hearing were: Aaron Cutler, Partner at Hogan Lovells; Dion Harrison, Director at Elevate; T. Michael Price, President and CEO of First Commonwealth Financial Corporation on behalf of the Pennsylvania Bankers Association; Scott Astrada, Director of Federal Advocacy at the Center for Responsible Lending; and Stuart Rubinstein, President at Fidelity Wealth Technologies.  Subcommittee Chairman Blaine Luetkemyer (R-MO) noted that the “pace of technological development in financial services has increased exponentially and dramatically, offering both benefits and potential challenges to the U.S. economy and consumers,” but cautioned that lawmakers and regulators cannot “address innovation and growth without addressing the security of that data.”

House Passes Three “Tax Reform 2.0” Bills

On 27 and 28 September, the U.S. House of Representatives passed three bills from a group of bills known as “Tax Reform 2.0”:

·        H.R. 6757, the Family Savings Act, which would expand 529 college saving plans accounts, create universal savings accounts, and make other retirement plan changes. 

·        H.R. 6756, the American Innovation Act, which would expand start-up business deduction limits and allow start-up businesses to immediately deduct their start-up or organizational expenses.  The bill would also allow new businesses to retain their built-up benefits if ownership changes.

·        H.R. 6760, the Protecting Family and Small Business Tax Cuts Act of 2018, which would permanently extend the tax cuts the tax cuts enacted last December as part of the Tax Cuts and Jobs Act, including: lower individual rates, the larger standard deduction and child tax credit, the doubled estate-tax exemption, a twenty percent deduction for income of partnerships and other similar businesses, and the $10,000 cap on the deduction for state and local taxes. 

Bipartisan Letter Sent to SEC Seeking Token Clarity

On 28 September, Representative Ted Budd (R-NC) announced that he and Representatives Warren Davidson (R-OH), Tom Emmer (R-MN), Darren Soto (D-FL), and eleven others sent a letter to SEC Chairman Jay Clayton requesting the SEC to “clarify the criteria they use [to] determine when offers and sales of digital tokens should be classified [as] ‘investment contracts’ and therefore securities.”  In the letter, the lawmakers said that they are “concerned about the use of enforcement actions alone to clarify policy and believe that formal guidance may be an appropriate approach” to help clear up legal uncertainties.  The members’ goal is to help ensure “this new technology” is not driven offshore to foreign jurisdictions and to make sure that the U.S. “is the world’s leader in financial technology.”  The letter does not give the SEC a timeline to respond, but it does caution the agency to “be mindful of the speed at which the industry is developing” and that “any response should strive to endure future evolution of the technology.”

SEC & Securities

SEC Issues FAQs Regarding Regulation Crowdfunding and Intermediary Requirements

On 25 September, the SEC’s staff of the Division of Trading and Markets issued a new set of frequently asked questions (“FAQs”) for intermediaries offering services in connection with an offering of securities under Regulation Crowdfunding.  The FAQs address issues such as: conflicts of interest, compensation, due diligence requirements, recordkeeping, requirements for communications, custody of payments, fees to investors, and registration as a funding portal. 

SEC Hosts Roundtable on Combating Retail Investor Fraud

On 26 September, the SEC staff hosted a roundtable on combating retail investor fraud.  The first panel addressed the types of fraudulent and manipulative schemes currently targeting retail investors.  Charu Chandrasekhar, Assistant Director for the SEC’s Division of Enforcement, noted that retail investor fraud is a broad category that includes boiler-room schemes and Ponzi schemes, and that the internet is playing an emerging role in propagating fraud, particularly in the cryptocurrency space.  When asked about what policy areas the SEC is exploring to address fraud, Chandrasekhar said the SEC’s proposed Regulation Best Interest will be an “important vehicle” to help investors understand their relationships with financial professionals.  The second panel addressed how to enhance the ability of broker-dealers to prevent retail investor fraud.  Michael Rufino, Executive Vice President and Head of Member Regulation at the Financial Industry Regulatory Authority (“FINRA”), said suspicious activity reports are “invaluable” to regulators and law enforcement in identifying and battling fraud.  The third panel addressed additional fraud prevention tools, such as  the various halts FINRA can place on trades; the panelists, however, acknowledged that deciding when to halt trading is a complex issue. 

SEC Proposes Amendments to Codify Exemption to Credit Rating Agency Rule

On 26 September, the SEC announced that it had voted to propose rule amendments to codify an existing temporary exemption for credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (“NRSROs”).  The existing exemption available to rating agencies is in regard to their obligations under Exchange Act Rule 17g-5(a)(3) (addressing conflicts of interests) concerning ratings of structured finance products.  The exemptions would only be available if (i) the issuer of the relevant security or instrument is not a U.S. person and (ii) the NRSRO reasonably believes that all offers and sales of the security or instrument will occur outside of the U.S.  Comments are due 30 days after the proposed rule is published in the Federal Register.

Commissioner Stein Speaks on Financial Data

On 27 September, Commissioner Kara Stein delivered remarks before the Georgia State University College of Law entitled “From the Data Rush to the Data Wars: A Data Revolution in Financial Markets.”  Commissioner Stein began her speech by illustrating the mass collection of data that happens every day and how in the past decade the “race to collect and control data is intensifying.”  As a result, Stein sees the “two classes” emerging in the race for data superiority: “those who can pay for data and those who can’t.”  As a result, she believes we need a “different kind of regulation” in order to keep pace with the rapid innovation our economy is experiencing.  She argues that the Commission must be “more creative and forward-leaning” to individuals and companies by establishing regulatory guideposts so that individuals and companies can “better and more cost-efficiently explore the new frontier, while being mindful of the collateral impacts on our entire community.”  Stein points to the Consolidated Audit Trail (“CAT”) as a project the SEC needs to prioritize because, in her opinion, the CAT “will have the ability to transform market surveillance and our understanding of the market.”  However, while Stein believes that the Commission should help firms cultivate the potential that data aggregation provides, she said the SEC should “modernize [its] regulatory approach regarding the overall collection, protection, use, and sharing of personal investor data” in parallel because “[o]ne of the most important investor protection initiatives remains protecting the privacy of consumers and their information.” 


On 24 September, the SEC staff announced it will host a two-day roundtable on market data and market access on 25-26 October.  The roundtable will discuss: (i) the “Overview of [the] Current Landscape for Market Data Products and Market Access Services”; (ii) “SIP Core Data Products and Exchange Top-Of-Book Data Products”; (iii) “Exchange Depth-Of-Book Data Products and Market Access Services”; (iv) the “Elements of the Core Data Infrastructure”; (v) the “Governance of Core Data Infrastructure”; (vi) the “Funding of Core Data Infrastructure”; and (vii) “Public Transparency.” 

Bank Regulators

Fed Holds FOMC Meeting

On 25-26 September, the Federal Reserve (“Fed”) held its sixth Federal Open Markets Committee (“FOMC”) meeting of the year.  At the meeting, the FOMC decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent from 1-3/4 to 2 percent.  Also, in the FOMC’s Implementation Note, the Fed announced it had voted unanimously to approve a 1/4 percent increase in the primary credit rate to 2.75 percent, effective 27 September 2018.  The next FOMC meeting is scheduled for 7-8 November 2018.   

Fed Chairman Powell Delivers Remarks on the U.S. Economy

On 27 September, Fed Chairman Jerome Powell delivered remarks at the Rhode Island Business Leaders Day regarding the U.S. economy.  Chairman Powell said that “[o]ur economy is strong” because we have healthy growth, low unemployment, “low and stable” inflation, and increased wages.  As a result, Powell said that the Fed has been increasing the interest rates “closer to the levels that are normal in a healthy economy” in order to help sustain our strong economy.  Powell noted how the Fed is working to make the financial system safer by “holding the largest banks to much higher standards” regarding their capital and liquidity thresholds.  In closing he said that he is confident that our economy is in a far better position today and that the Fed will continue to work to sustain these “fundamental improvements.” 


·        1 Oct: Comments due for the Commodity Futures Trading Commission’s (“CFTC”) proposed rule on position limits and position accountability for security futures products.

·        1 Oct: Comments due for SEC proposed rule on permitting ETFs that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order.

·        1 Oct: CFTC Chairman Chris Giancarlo to speak at SIFMA’s Annual Meeting.

·        2 Oct: Senate Banking Committee hearing entitled “Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act.”

·        3-4 Oct: CFTC to host first FinTech Conference.

·        4 Oct: SEC’s San Francisco Office will host the “RISE of California: Retirement Investment Summit on Education.” 

·        4 Oct: Senate Banking Committee hearing entitled “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.”

·        5 Oct: CFTC’s Technology Advisory Committee meeting to hear presentations from select subcommittees and to discuss how RegTech is opening up the possibility of machine- readable and executable regulatory rulebooks.

Ianthe Zabel
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