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US Regulatory Research

US Regulatory Updates

US Regulatory Update


Treasury and IRS Propose Restricting “Deemed Repatriations” by Controlled Foreign Corporations

On 5 November, the Department of the Treasury (“Treasury”) and Internal Revenue Service (“IRS”) released proposed regulations that affect certain U.S. corporations that own stock in foreign corporations.  The proposed regulations would limit the circumstances under which a "deemed repatriation" of the earnings of a “controlled foreign corporation” under Internal Revenue Code (“IRC”) Section 956 would be taxable to a corporate U.S. shareholder that owns at least 10 percent of the voting power or value of the foreign company.  Under the Tax Cuts and Jobs Act, dividends paid by a controlled foreign corporation to a corporate 10-percent U.S. shareholder generally are tax-exempt if the shareholder has held the stock for more than a year; however, the Act did not explicitly provide a similar exemption for income inclusion under IRC Section 956.  Thus, the proposed regulations would generally exempt a corporate 10-percent U.S. shareholder from tax under Section 956 if the shareholder would not have been subject to tax on an actual dividend from the controlled foreign corporation. 

Treasury Announces Re-Imposition of Sanctions on Iranian Regime

On 5 November, the Treasury’s Office of Foreign Assets Control (“OFAC”) announced that it had “sanctioned more than 700 individuals, entities, aircraft and vessels” as “a critical part of the re-imposition of the remaining U.S. nuclear-related sanctions that were lifted or waived in connection” with the Iran nuclear deal, from which the U.S. has withdrawn.  According to announcement, “OFCA’s action is designed to disrupt the Iranian regime’s ability to fund its broad range of malign activities, and places unprecedented financial pressure on the Iranian regime to negotiate a comprehensive deal that will permanently prevent Iran from acquiring a nuclear weapon, cease Iran’s development of ballistic missiles, and end Iran’s broad range of malign activities.”  OFAC also issued a set of revised FAQs regarding the re-imposed sanctions.  

FFIEC Releases Statement on OFAC Cyber-Related Sanctions

On 5 November, the Federal Financial Institutions Examination Council (“FFIEC”) members issued a joint statement “alerting financial institutions to recent actions taken by the Department of Treasury’s Office of Foreign Asset Control (OFAC) under their Cyber-Related Sanctions Program and to the potential impact it may have on financial institutions’ risk-management programs.”  The statement warns that “[c]ontinued use of products or services from a sanctioned entity, directly or indirectly through a service provider, may increase operational and OFAC compliance risk for a financial institution and could result in violations of law, civil money penalties, enforcement actions, and damage to the financial institution’s reputation.”      

U.S. Congress

Senate Banking Committee Members Send Letter to FDIC Regarding Operation Chokepoint

On 7 November, Republican members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs sent a letter to Federal Deposit Insurance Corporation (“FDIC”) Jelena McWilliams regarding Operation Choke Point, a 2013 initiative of the Obama Administration aimed at discouraging banks from doing business with firearm dealers, payday lenders, and other companies.  The Committee members note that the Department of Justice “has admitted that Operation Choke Point was inappropriate and claims that it has been terminated,” but they express concern that “many [FDIC] policies that are communicated to regulated institutions are inconsistent across the FDIC and often done verbally (and secretly).”  The letter states, “]Recently released internal [FDIC] documents regarding Operation Choke Point highlight the need for the FDIC to send a clear message that the old culture of Operation Choke Point is over and the need to review how policy has been communicated from the FDIC to regulated institutions.”  The Committee members request that the FDIC respond to questions about the FDIC’s “official position” and how the FDIC is ensuring that examiners are communicating its policy to banks.       

SEC & Securities

SEC Commissioner Peirce Speaks on Enforcement Statistics

On 26 October, Securities and Exchange Commission (“SEC”) Commissioner Hester Peirce delivered remarks at the 26th Annual Securities Litigation and Regulatory Enforcement Seminar in a speech entitled “Lies and Statistics.”  Peirce stated that the number of enforcement cases, initiated or settled, and the penalty amounts is a “meaningless measure of the effectiveness of the enforcement program.”  She believes that a better indicator of the success of the SEC’s enforcement work would be an analysis of the different types of cases brought.  Additionally, Peirce stated that the SEC should be open to asking for and receiving help as it considers how to better protect investors and capital markets.  Peirce suggested that the SEC, among other things: (i) revisit SEC rules implementing antifraud statutes to ensure the rules are accomplishing their intended mission; (ii) consider a rulemaking to alter the transfer agent rules and reporting requirements; and (iii) help public companies build more effective Foreign Corrupt Practices Act compliance programs. 

FINRA Announces Plans to Update its eFOCUS Filing System

On 5 November, the Financial Industry Regulatory Authority (“FINRA”) released a Regulatory Notice regarding its electronic FOCUS filing system (“eFOCUS System”) and annual audit requirements.  In response to the SEC’s amendments that simplify and update certain of the FOCUS reporting requirements for brokers and dealers, FINRA is updating the eFOCUS System to, among other things: (i)  reflect updated U.S. GAAP requirements; and (ii) require that a broker-dealer’s annual audit report include a Statement of Comprehensive Income, in lieu of a Statement of Income, to the extent there is other comprehensive income for the reporting period.  The new reporting requirements will apply beginning with annual FOCUS reports filed for  fiscal years ending in January 2019. 

SEC’s Investor Advisory Committee Holds Meeting on Regulation Best Interest and Form CRS

On 7 November, the SEC’s Investor Advisory Committee (“IAC”) held a telephonic meeting to discuss the SEC’s Proposed Regulation Best Interest and Form CRS.  At the meeting, the IAC voted 16-3 to send the following recommendations of the IAC to the Commission:

o    “the standard for broker-dealers and investment advisers alike should be clarified with regard to the obligation to act in customers’ best interests”;

o    the best interest obligation should be expanded “to cover rollover recommendations and recommendations by dual registrant firms regarding account types”;

o    “the best interest standard is, and should be characterized explicitly as, a fiduciary duty, while making clear that the specific obligations that flow from that duty will vary based on differences in business models”; and

o    “before adopting the disclosure obligations, the Commission should conduct usability testing of the proposed Form CRS disclosures and, if necessary, revise them to ensure that they enable investors to make an informed choice among different types of providers and accounts.”

SEC Updates Compliance and Disclosure Interpretations on Regulation S-K

On 7 November, the SEC updated its Compliance and Disclosure Interpretations (“C&DIs”) related to Regulation S-K and several rules and forms under the Exchange Act. Regarding Regulation S-K, the SEC Staff advised in Question 102.01 that under certain circumstances a company can be an “accelerated filer” and a “smaller reporting company” at the same time.  Additionally, in Question 102.02, the SEC staff advised that if a reporting company determines it does not qualify as a “smaller reporting company” for a particular year, then the company will be able to qualify when making a subsequent annual determination if the company’s public float or annual revenues decrease below certain thresholds.  Regarding the Exchange Act forms, in Question 104.13, the SEC staff provided guidance on when an issuer can use the disclosure permitted for smaller companies in a definitive proxy statement.

SEC’s Office of Investor Advocate Releases Report on Investor Testing

On 7 November, the SEC’s Office of Investor Advocate (“OIA”) released a report on investor testing conducted by the RAND Corporation.  The RAND Corporation gathered feedback on a sample Relationship Summary issued in April 2018 as part of a package of proposed rulemakings and interpretations “designed to enhance the quality and transparency of investors’ relationships with investment advisors.”  According to SEC Chairman Jay Clayton, “[t]he SEC staff is carefully reviewing RAND Corporation’s testing report as well as other information relating to the proposed Relationship Summary.”  The SEC’s release states that “the [OIA] is making this report available to allow the public to consider and comment on this supplemental information.”

SEC Director of Investment Management Blass Speaks on Regulation Best Interest and Variable Contract Disclosure

On 8 November, SEC Division of Investment Management Director Dalia Blass delivered remarks before the ALI CLE 2018 Conference on Life Insurance Company Products.  In her speech, Blass expressed support for the proposed Regulation Best Interest standards of conduct for financial professionals and emphasized the importance of preserving investor choice.  Specifically, she pointed out that “investors can benefit from a variety of financial services [and] they can also benefit from a variety of investment options.”  Blass believes that Regulation Best Interest and Form CRS will benefit investors by facilitating regulatory consistency. Regarding variable contract disclosures, Blass urged the public to comment on the consequences of the SEC’s proposed amendments to the disclosure framework for variable contracts.  She said that the amendments “could be on the books for a long time,” and the SEC does not want the proposed rule to be “out of date the minute it is adopted.”  Finally, Blass addressed concerns regarding the impact of the SEC’s recently adopted liquidity management rule for mutual funds holding more than 15 percent in illiquid assets.  She noted that there are concerns that mutual funds will be forced to sell assets because of the rule, but she said the rule is intended to ensure “that advisers and boards should take the situation seriously and act in the best interests of the fund to move its portfolio into an appropriate liquidity posture.”


On 5 November, the SEC announced that Anthony S. Kelly, Co-Chief of the Division of Enforcement’s Asset Management Unit, will be leaving the SEC this month.  

On 8 November, the SEC announced the agenda and panelists for the staff roundtable on the proxy process on 15 November.  The panels topics are: (i) “Proxy Voting Mechanics and Technology”; (ii) “Shareholder Proposals – Exploring Effective Shareholder Engagement”; and (iii) “Proxy Advisory Firms – The Current and Future Landscape.”  The roundtable will begin at 9:30 a.m. at the SEC’s headquarters in Washington, D.C., and public comments may be submitted electronically or on paper. 

CFTC & Derivatives

CFTC Chairman Giancarlo Speaks on Market Regulation in the Digital Era

On 7 November, Commodity Futures Trading Commission (“CFTC”) Chairman Christopher Giancarlo delivered remarks at the George Washington University Law School’s FinTech Week in a speech entitled “Quantitative Regulation: Effective Market Regulation in a Digital Era.”  Chairman Giancarlo focused on three key themes: (i) the central role of data; (ii) the importance of automated data analysis; and (iii) the use of machine learning to increase effectiveness.  He urged the CFTC and other market regulators to “pioneer a new frontier of quantitative regulation” by ushering in the “next phase of regulatory data collection, automated analysis and data-driven policy application,” and he stated that “we have no choice but for the CFTC to adopt effective and up-to-date, big data analysis capability.”  He believes that the ability to “digitize rule sets” and “consume, process, and analyze data in real-time” can be the capability that allows the CFTC to explore the application of “agile regulation.”  Giancarlo thus recommended that the CFTC establish a new office of data and analytics as a stand-alone department to serve the CFTC’s needs and operating divisions.  He acknowledged, however, that the CFTC must gather no more data than it is prepared to analyze and then commit to analyze all data that it does collect: he also stated that the CFTC should make anonymized data available to market participants for their own data analysis.

Bank Regulators

Fed Releases and Implements FOMC Statement Regarding Monetary Policy Implementation

On 8 November, the Fed released an Implementation Note regarding its decisions to implement the monetary policy stance announced by the Federal Open Market Committee (“FOMC”) in a statement released the same day. The Fed’s decisions include: (i) maintaining the interest rate paid on required excess reserve balances at 2.20 percent; and (ii) approving the establishment of the primary credit rate at the existing level of 2.75 percent. 

Fed Vice Chairman Quarles Speaks on Stress Testing

On 9 November, Fed Vice Chairman for Supervision Randal Quarles delivered remarks before the Brookings Institution in a speech entitled “A New Chapter in Stress Testing.”  Quarles said the Fed is considering plans to broaden its proposal to ease stress testing for the largest banks by reducing the chance they fail the annual assessments.  Quarles said that the changes under consideration “are not intended to alter materially the overall level of capital in the system.”  One of the changes for large firms would be to replace the 2.5 percent risk-based capital buffer with a cushion that depends on a firm’s stress-test results.  Other possible changes the Fed is considering include: (i) providing lenders their exam grades prior to their dividend and share re-purchase plan submissions; (ii) eliminating the post-stress leverage requirement because it is only meant as a backstop to risk-based capital; and (iii) providing firms with increased transparency of the stress test and its inputs and outputs. 

Fed Releases its Supervision and Regulation Report

On 9 November, the Fed released its inaugural Supervision and Regulation Report, which summarizes banking conditions and the Fed’s supervisory and regulatory activities.  In addition to a summary of key developments and trends, the report is divided into three sections:

o    Banking System Conditions, which provides an overview of trends in the banking sector based on data collected by the Fed and other federal financial regulatory agencies as well as market indicators.

o    Regulatory Developments, which provides an overview of the current areas of focus of the Fed’s regulatory policy framework, including pending rules.

o    Supervisory Developments, which provides background information on supervisory programs and approaches, as well as an overview of key themes and trends, supervisory findings, and supervisory priorities. 


·         Nov. 14: House Financial Services Committee hearing entitled “The Semiannual Testimony of the Federal Reserve’s Supervision and Regulation of the Financial System.”

·         Nov. 15: Senate Banking Committee hearing entitled “The Semiannual Testimony of the Federal Reserve’s Supervision and Regulation of the Financial System.”

·         Nov. 15: SEC staff roundtable on the proxy process. 

·         Nov. 19: Comments due on the SEC’s proposed rules regarding (i) capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants, and (ii) capital requirements for broker-dealers.

Ianthe Zabel
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