US Regulatory Update
DOL Proposes Regulation to Allow Small Business to Join on 401(k) Plans
On 22 October, the Department of Labor (“DOL”) announced a Notice of Proposed Rulemaking to make it easier for small businesses join together to offer 401(k) plans to their employees. The DOL stated that if the rule is adopted, the new type of plans, called Association Retirement Plans, will (i) reduce administrative costs and (ii) strengthen the position of small businesses in negotiations with financial institutions and other service providers. The rule would broaden the availability of multiple employer plans (known as “MEPs”), which currently are limited to certain types of groups of employers. Comments on the proposed rule are due on 24 December.
SEC & Securities
SEC Commissioner Stein Speaks on Improving Disclosures
On 23 October, Securities and Exchange Commission (“SEC”) Commissioner Kara Stein delivered remarks before the Council of Institutional Investors 2018 Fall Conference in a speech entitled “Improving Information for Investors in the Digital Age.” Commissioner Stein advocated for the SEC to create a broader range of standardized disclosure requirements, including disclosures relating to environmental, social, and governance (“ESG”) issues. In her speech, Stein rebutted the argument that investors are overloaded with information from public companies and ESG disclosures would only add to the “information overload.” Stein claimed that she has “not heard this concern expressed by even one investor” in her five years at the Commission. She argued that because many public companies are already disclosing this type of information voluntarily, the SEC should address the lack of uniform standards and comparability between companies. Specifically, Stein claimed that “some form of” non-generally accepted accounting principles (“GAAP”) metrics are already disclosed by “[n]inety-seven percent of all S&P 500 companies,” but because the metrics are not standardized or uniform, they are less useful to investors.
SEC Director of IM Remarks on Fund Disclosure, Derivatives Rulemaking, and Staff Guidance
On 25 October, SEC Director of the Division of Investment Management (“IM”) Dalia Blass delivered remarks before the ICI Securities Law Development Conference regarding fund disclosure, fund use of derivatives, and SEC staff guidance. With respect to fund disclosure, Director Blass reviewed the actions taken by the Commission as part of its initiative launched last year to improve investor experience, including issuing a request for comment regarding the content, design, and delivery of fund disclosures and adopting Rule 30e-3. Blass emphasized, however, that “no single form, statement or rule is going to finish the work of modernizing the content, design and delivery of disclosure” and urged stakeholders to consider steps they could take to improve the disclosure regime. Concerning fund use of derivatives, She stated that the Commission can “do better than the current guidance,” including reconsidering a proposed rule on the use of derivatives by registered investment companies. But Blass noted some issues that the Commission is having trouble addressing, including the how the Commission should approach “leverage risk in a dynamic market” and the role of risk management in the use of derivatives. With respect to staff guidance, she reiterated the views expressed by SEC Chairman Jay Clayton in his recent statement regarding staff views that “statements of the staff are not statements of the Commission, and they do not have the force of law” and indicated that the Commission will continue to review and assess prior staff statements to determine whether any changes need to be made.
SEC Holds Roundtable on Market Data and Market Access
On 25-26 October, the SEC’s Division of Trading and Markets held a two-day roundtable on market data and market access. The participants discussed, among other things: (i) the current landscape for market data products and market access services; (ii) securities information processor (“SIP”) core data products and exchange top-of-book data products; (iii) exchange depth-of-book data products and market access services; (iv) elements of the market data products (“Core Data”) and market access services (“Core Access”) that market participants need to trade effectively in today’s market structure (collectively, the “Core Data Infrastructure”); (v) governance of the Core Data Infrastructure; (vi) funding of the Core Data Structure; and (vii) the transparency of the Core Data Structure to the public. A more detailed discussion of the event will be provided in a separate publication.
NYDFS Authorizes Cryptocurrency Exchange to Offer Custody Services
On 23 October, the New York Department of Financial Services (“NYDFS”) authorized Coinbase Custody Trust Company LLC, a wholly-owned subsidiary of Coinbase Global, Inc., to operate as a limited purpose trust company in New York. The NYDFS also approved Coinbase Trust to offer secure custody services for Bitcoin, Bitcoin Cash, Ethereum, Ether Classic, XRP, and Litecoin.
FINRA Proposes Conflict of Interest Restrictions for Former FINRA Employees
On 24 October, the Financial Industry Regulatory Authority (“FINRA”) proposed a conflict of interest rule, effective immediately, for former FINRA employees. Rule 9910, the “Post-Employment Conflict of Interest Restriction; Nonpublic Information,” would prohibit:
· any former FINRA officer from making certain communications to, or appearances before, FINRA for one year after the termination of his or her employment;
· any former FINRA employee from making certain communications to, or appearances before, FINRA at any time in a matter that involves a specific party with which the employee was "personally and substantially involved" during his or her employment;
· any former FINRA employee from making certain communications to, or appearances before, FINRA for two years in a matter involving a specific party that was under the employee's "official responsibility" during the last year of his or her employment; and
· any current or former FINRA employee from disclosing any nonpublic information obtained during the duration of his or her employment with FINRA, unless the disclosure is authorized by FINRA or is required or protected by law.
On 24 October, the SEC issued the agenda for its 29 October Fixed Income Market Structure Advisory Committee meeting. The agenda includes (i) recommendations on ETF classification and education data; (ii) recommendations on the collection and dissemination of reference data; and (iii) a panel discussion on the role of credit ratings.
CFTC & Derivatives
CFTC Commissioner Behnam Speaks on Benchmark Reform, Initial Margin, Cross-Border Regulation, Brexit, and FinTech.
On 25 October, Commodity Futures Trading Commission (“CFTC”) Commissioner Rostin Behnam delivered remarks before the 2018 ISDA Annual Japan Conference regarding benchmark reform, initial margin, cross-border regulation, Brexit, and FinTech.
· Benchmark Reform: Commissioner Behnam discussed the erosion of the unsecured interbank term borrowing market, such as the declining use of the London Interbank Offered Rate (“LIBOR”), and noted that there is a “real threat that LIBOR might disappear post 2021.” He noted that the U.S. is transitioning to the use of an alternative rate and that the Alternative Reference Rates Committee (“ARRC”) has “published [a] paced transition plan [that] anticipates the adoption of the [Secured Overnight Financing Rate (“SOFR”)] as the benchmark for interest rate derivatives in the first quarter of 2019.”
· Initial Margin: Behnam discussed (i) the creation of the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions’ (“IOSCO”) working group on margin requirements (“WGMR”), and (ii) the development of a “policy framework establishing BCBS/IOSCO standards for margin for uncleared swaps.”
· Cross-Border Regulation: Commissioner Benham urged the CFTC to conduct its rulemaking based on “internal consensus in accordance with formal, statutory procedures while appropriately considering its own mission in context with the needs of and affording deference towards our fellow global regulators.”
· Brexit: Behnam emphasized the importance of regulatory deference irrespective of the outcome of the separation between the UK and EU, stating that “deference to comparably robust regulatory regimes prevents overly burdensome and conflicting regulatory requirements from reducing market efficiencies while ensuring that global markets are successfully protected.”
· FinTech: Behnam emphasized the need to approach FinTech with “an open mind and a healthy respect for our role in the markets,” but noted that there are also significant risks involved in the development of new technology such as distributed ledger technology and blockchains.
Fed Releases October Beige Book
On 24 October, the Federal Reserve (“Fed”) released its October Beige Book, a publication about current economic conditions across the twelve Fed Districts through 15 October. According to the publication, wages and prices moved higher in the twelve Fed Districts through mid-October but only at a “modest to moderate” pace. The Fed reported that retailers in some districts were able to raise prices. Regarding trade, the publication found that “[s]everal districts indicated that firms faced rising materials and shipping costs, uncertainties over the trade environment and/or difficulties finding qualified workers.” Overall, economic activity expanded at a “moderate to modest” pace.
Fed Senior Associate Director Warns of Loosening in Leveraged Loan Market
On 24 October, Reuters reported that Todd Vermilyea, senior associate director at the Fed, spoke at the Loan Syndications and Trading Association’s annual conference and expressed concern about “a material loosening of terms and weaknesses in the risk management” of the leveraged loan market. According to prepared remarks by Vermilyea, the three areas regulators are most focused on are covenant-lite loans, incremental facilities, and addbacks to EBITDA (earnings before interest, taxes, depreciation, and amortization).
On 24 October, the Fed announced it will hold an open board meeting on 31 October to consider prudential standards for large bank holding companies, savings and loan holding companies, and state member banks.
· Oct. 29: Comments due on the CFTC’s proposed rule exempting from the Commodity Exchange Act’s clearing requirement certain swaps entered into by certain bank holding companies, savings and loan holding companies, and community development financial institutions.
· Oct. 29: Comments due on the Fed, OCC, and FDIC’s interim final rule expanding the examination cycle for certain qualifying insured depositary institutions.
· Oct. 29: Comments due on the Fed’s interim final rule raising asset size threshold for determining applicability of the Fed’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement.
· Oct. 31: The SEC will hold an open meeting to consider whether to adopt amendments and related guidance to modernize the property disclosure requirements for mining registrants.
· Oct. 31: Comments due on the SEC’s request for comment on the framework under which intermediaries may charge fees for distributing certain non-proxy disclosure materials to fund investors.
· Oct. 31: Comments due on the SEC’s request for comment on enhancing disclosures by mutual funds, exchange-traded funds, and other types of investment funds.
· Nov. 1: CFTC Commissioner Behnam to give the keynote speech and participate in a panel discussion at the ASIFMA 2018 Annual Conference: Developing Asia’s Capital Markets.
· Nov. 5: The CFTC will hold an open meeting to consider: (i) a final rule on amending the De Minimis exception to the swap dealer definition; (ii) a proposed rule on amendments to regulations on swap execution facilities and the trade execution requirement; and (iii) a request for comment regarding the practice of “Post-Trade Name Give-Up” on swap execution facilities.
· Nov. 5: Comments due on the SEC’s proposed amendments to rules for nationally recognized statistical rating organizations.
· Nov. 7: The SEC’s Investor Advisory Committee will hold a telephonic meeting to discuss the SEC’s proposed Regulation Best Interest and Form CRS Relationship Summary.