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US Regulatory Update

SEC & Securities

SEC Commissioner Peirce Speaks on G20 Swaps Reform

On 15 October, Securities and Exchange Commission (“SEC”) Commissioner Hester Peirce delivered remarks before the International Regulators Conference in a speech entitled “Pittsburgh Principles and Regulatory Realities.”  In her speech, Commissioner Peirce offered recommendations to regulators on implementing G20 swaps reforms.  Peirce cautioned that the G20 reforms are not foolproof and that regulators should exercise “healthy skepticism” when implementing them.  She argued that “poorly designed regulations” played a key role in the 2007-2009 financial crisis, specifically the “favorable regulatory treatment given to highly rated securitization tranches.”  Regarding security-based swaps reform, Peirce suggested that the SEC should:

·        “be open to reconsidering elements of our proposed or final requirements for the purpose of building a strong, solid, lasting regulatory framework”;

·        “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”;

·        “account for the challenges that market participants will face as they come into compliance with an entirely new, comprehensive, and extremely complicated regulatory regime”;

·        “provide the market with adequate time to prepare for and then comply with these requirements”; and

·        “[work] with our fellow regulators to ensure that multiple rulesets do not unduly burden market participants.”

SEC Holds FIMSAC Meeting

On 29 October, the SEC’s Fixed Income Market Structure Advisory Committee (“FIMSAC”) held a meeting to discuss (i) a draft recommendation on the collection and dissemination of reference data and (ii) the role of credit ratings.  In his opening statement, SEC Chairman Jay Clayton noted (i) the importance of pricing in the marketplace and (ii) his view that with a dynamic economy the pricing model should be reviewed and improved.  Regarding reference data, the FIMSAC Members voted to approve the Technology and Electronic Trading Subcommittee’s recommendation to make improvements to fixed income reference data by creating a single central source of new issue reference data like that available in the municipal bond market.  The Subcommittee believes the new issue reference data should be disseminated in real time to all reference data vendors and market participants to ensure that everyone has access to the same data at the same time.  Regarding credit ratings, the panelists focused on (i) the potential impact of increased mergers and acquisitions activity with leverage and the increase in corporate debt overall in a potential economic downturn and (ii) ways to improve the application and reliability of ratings and the distinguishing factors between investment and non-investment grade.

SEC Proposes Disclosure Improvements for Variable Annuities and Variable Life Insurance Contracts

On 30 October, the SEC issued a proposed rule designed to improve disclosures for investors regarding variable annuities and variable life insurance contracts. The proposed rule would permit these contracts to use a summary prospectus to provide disclosures to investors. The summary prospectus “would be a concise, reader‑friendly summary of key facts about the contract,” and “[m]ore‑detailed information about the contract would be available online” or via paper at the investor’s discretion.”  The proposed rule also would: (i) improve the content, format, and presentation of information to investors in these contracts’ registration forms; (ii) require that the statutory prospectus be available on a website specified on, or hyperlinked in, the cover of the summary prospectus; and (iii) revoke certain rules and forms “rendered moot by legislative actions” or that are no longer needed.  Comments on the proposed rule are due by 15 February 2019.

On 30 October, in conjunction with the above proposed rule, the SEC’s Office of Investor Education and Advocacy issued two Investor Bulletins on variable life insurance and variable annuities to educate investors about their respective risks and benefits.  The bulletin also provides information on fees and expenses, insurance options, and links to additional resources.

FINRA Proposes Amendments to Corporate Financing Rule

On 30 October, the Financial Industry Regulatory Authority (“FINRA”) issued a proposed rule to make “substantive, organizational and terminology” amendments to Rule 5110 in order to ensure that underwriters’ fees are fair and reasonable.  The proposal is intended to (i) modernize Rule 5110, (ii) simplify and clarify its provisions, and (iii) maintain protections for issuers and investors that participate in public offerings. 

SEC Issues a Commission Statement Regarding Certain Provisions of its Business Conduct Standards for SBS Dealers and Major SBS Participants.

On 31 October, the SEC announced it had voted to issue a Commission Statement that certain actions with respect to specific provisions of its Business Conduct Standards for Security-Based Swap (“SBS”) Dealers and Major SBS Participants will not provide a basis for a Commission enforcement action.  The Commission issued the statement in response to “practical compliance difficulties” raised by market participants.  The statement sets forth the Commission’s following “no-action” positions that are “limited to the Commission's enforcement discretion…and [do] not modify or change any contractual rights between counterparties to security-based swaps":

·        An SBS Dealer may treat a non-ERISA benefit plan as a non-special entity under Exchange Act Rule 15Fh-2 if the plan previously represented that it is not a "special entity" for purposes of Commodity Futures Trading Commission (“CFTC”) business conduct requirements.

·        An SBS Dealer may rely on certain representations given by a special entity for purposes of CFTC business conduct rules in determining that the dealer satisfies the safe harbor to be deemed not to "act as an advisor to a special entity" under Exchange Act Rule 15Fh-2.

·        An SBS Dealer may rely on certain representations given by a special entity for purposes of CFTC business conduct rules in satisfying the safe harbor for certain requirements applicable to an SBS Dealer acting as a counterparty to a special entity under Exchange Act Rule 15Fh-5.

·        An SBS Dealer may, "unless it has information that would cause a reasonable person to question the accuracy of the representation if the representation were given in relation to security-based swaps," rely on representations from a counterparty or its representative previously given in relation to "swaps" for purposes of Exchange Act Rule 15Fh-1.

The relief provided in the statement “applies only to the exercise of [the SEC’s] enforcement discretion,” and lasts until five years after the compliance date for the SBS entity registration rules.

SEC Adopts Final Rule to Modernize Property Disclosures Required for Mining Registrants

On 31 October, the SEC voted to adopt final amendments to modernize the property disclosure requirements for mining registrants and related guidance.  The amendments will “provide investors with a more comprehensive understanding of a registrant’s mining properties, which should help them make more informed investment decisions.”  According to the final rules, a registrant with “material mining operations” must disclose specified information in its filings concerning its mineral resources and mineral reserves.  The final rules provide a two-year transition period so that a registrant will not be required to begin to comply with the rules until its first fiscal year beginning on or after 1 January 2021.   

SEC’s OCIE Issues Risk Alert Regarding the Cash Solicitation Rule

On 31 October, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert “to provide investment advisers, investors and other market participants with information concerning the most common deficiencies the staff has cited” relating to the Cash Solicitation Rule (regarding cash fees paid by investment advisers to solicitor).  In the Alert, OCIE stated that it had observed advisers: (i) with third-party solicitors that did not provide solicitor disclosure documents to prospective clients or supply inadequate disclosures; (ii) that did not, in a timely manner, obtain signed and dated client acknowledgments of receipt of the adviser brochure and the solicitor disclosure document; (iii) that paid cash fees to solicitors without sufficient, or any, solicitation agreements in effect; (iv) that did not make an effort to determine whether third-party solicitors complied with their solicitation agreements; and (v) with similar conflicts that may implicate other provisions of the Advisers Act. OCIE recommended advisers review their policies and procedures to promote improvements in their adviser compliance programs. 

NYDFS Grants Virtual Currency License to Coinsource

On 1 November, the New York Department of Financial Services (“NYDFS”) granted its first currency license to a company operating Bitcoin Teller Machines in New York.  The NYDFS approved the application of Coinsource, Inc., which provides customers the ability to exchange Bitcoin and cash via touchscreen kiosks.  

SEC Enforcement Division Issues Report on FY18 Results

On 2 November, the SEC’s Division of Enforcement issued its annual report of its ongoing efforts to protect investors and market integrity.  According to the report, the Commission brought 821 enforcement actions in FY 18, comprised of (i) 490 “stand-alone” actions brought in federal court or as administrative proceedings, (ii) 210 “follow-on” proceedings seeking bars based on the outcome of Commission actions or actions by criminal authorities or other regulators; and (iii) 121 proceedings to deregister public companies – typically microcap issuers – that were delinquent in their Commission filings. The SEC also said it had returned almost $800 million to harmed investors in FY18. 

SEC Adopts Rules Regarding Information of Handling of Orders

On 2 November, the SEC announced that it had adopted rule amendments that will require broker­-dealers to disclose to investors new and enhanced information about the way they handle investors’ orders.  The rule changes relate to Rule 606 of Regulation National Market System (known as “Reg NMS”) regarding “not held” orders (e.g., an order in which the customer gives the broker-dealer price and time discretion).  The new disclosures center on “information about the average rebates the broker received from, and fees the broker paid to, trading venues.”       

CFTC & Derivatives

CFTC Commissioner Behnam Speaks on FinTech

On 31 October, Commodity Futures Trading Commission (“CFTC”) Commissioner Rostin Behnam delivered remarks before the Asia Securities Industry and Financial Markets 2018 Annual Conference in a speech entitled “FinTech, Friction, and Formula 1: A Learning Journey.”   In his remarks, Commissioner Behnam argued that regulation creates “necessary friction during the development stages [of financial innovation] to ensure that processes and products meet established standards and demonstrate proficiency before being introduced into our financial networks and to the public.”  Further, he criticized the U.S.’s FinTech regulatory agenda for being overly “enforcement-driven” and argued that “enforcement actions don’t always bring about enough thoughtful collaboration between legitimate firms and regulators.”  Additionally, Behnam urged the CFTC to take “step[s] towards standardized proficiency requirements for innovative developments to ensure that whatever products are introduced into our markets, they meet minimum standards of resiliency and stability.” In closing, he stated, “Regulators must always balance managing risk while facilitating innovation; providing certainty while remaining flexible; promoting growth while protecting the little guy—and we must maintain this balancing act while promoting transparency, engaging with stakeholders and the public, and maintaining full accountability.” 

CFTC Office of the Chief Economist Issues Report on Initial Margin Phase 5

On 31 October, the CFTC’s Office of the Chief Economist issued a report entitled “Initial Margin Phase 5,” which is about uncleared margin rules scheduled to go into effect 1 September 2020.  The purpose of the report is to serve as a guide for regulators as they respond to requests for relief by market participants who have argued that Phase 5 would bring a substantial number of relatively small market participants into scope and that the costs of implementing the new initial margin (“IM”) requirements would significantly burden the industry. The report concluded that, among other things:

·        Phase 5 could bring 700 entities in scope, versus an estimated 40 for Phase 1, but will encompass only 11 percent of the average aggregate notional amount (“AANA”) across all Phases;

·        nearly 60 percent of entities coming into scope in Phase 5 have AANAs of less than $25 billion and over 75 percent have AANAs less than $50 billion;

·        removing physically settled FX swaps from the scope of the AANA calculation could reduce the number of Phase 5 entities by around 30 percent; and

·        compliance with Phase 5 could necessitate implementing nearly 7,000 IM relationships, while excluding physically settled FX swaps from AANA could bring that number down to under 5,000.

CFTC Issues No-Action Letter Regarding Holding of Securities as Margin

On 31 October, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued a no-action letter “to provide relief to a futures commission merchant [“FCM”] from certain requirements regarding the holding of customer-owned securities as margin for trading on foreign futures and options markets under CFTC regulations.  The letter was issued due to certain changes to European laws following the issuance of an earlier no-action letter to the FCM.

On 31 October, CFTC Chairman Chris Giancarlo issued a statement saying that the no-action letter “reflects the CFTC’s continuing efforts to accommodate, where appropriate, cross-border derivatives activity in a changing global regulatory landscape.”

CFTC Holds Open Meeting

On 5 November, at an open meeting, the CFTC (i) adopted a final rule amending the de minimis exception to the swap dealer definition; (ii) approved a proposed rule to amend regulations on swap execution facilities (“SEFs”) and the trade execution requirement; and (iii) issued a request for comment regarding the practice of “Post-Trade Name Give-Up” on SEFs.  The final rule amending the de minimis exception amends the definition of the term “swap dealer” to set the permanent aggregate gross notional amount threshold for the de minimis exception at $8 billion in swap dealing activity entered into by a person over the preceding 12 months.  The proposed rule would amend existing requirements and propose new requirements pertaining to SEFs and the trade execution requirement, as set forth in the Commodity Exchange Act.  The proposed rules include the adoption and/or codification various existing staff guidance documents and staff no-action relief letters as well. 


Treasury Releases Report on U.S. Portfolio Holdings of Foreign Securities

On 31 October, the Department of the Treasury (“Treasury”) released the findings from its annual survey of U.S. portfolio holdings of foreign securities at year-end 2017.  Overall, the survey measured the value of U.S. portfolio holdings of foreign securities at year-end 2017 to be approximately $12.4 trillion (up from $9.9 trillion in 2016), with $9.1 trillion held in foreign equity (up from $7.1 trillion in 2016), $2.8 trillion held in foreign long-term debt securities (up from $2.4 trillion in 2016), and $0.5 trillion held in foreign short-term debt securities (up from $0.3 trillion in 2016). 

Bank Regulators

Agencies Jointly Propose to Update Calculation of Derivative Contract Exposure Amounts

On 30 October, the Federal Reserve (“Fed”), Federal Deposit Insurance Corporation (“FDIC”), and Office of the Comptroller of the Currency (“OCC”) issued a joint rule proposal to update the calculation of derivative contract exposure amounts under the regulatory capital rules.  The proposed rule “would provide the ‘standardized approach for measuring counterparty credit risk,’ also known as ‘SA-CCR,’ as an alternative approach to the agencies' current exposure methodology, or CEM, for calculating derivative exposure under the agencies' regulatory capital rules.”  The press release claims that “SA-CCR better reflects the current derivatives market and would provide important improvements to risk sensitivity, resulting in more appropriate capital requirements for derivative contracts exposure.”  The rule would allow "advanced-approaches" banking organizations -- banks with $250 billion or more in total consolidated assets, or $10 billion or more in on-balance sheet foreign exposure -- to use an alternative approach for calculating derivative exposures under regulatory capital rules.  If adopted, the proposed rule would (i) require advanced-approaches banking organizations to use SA-CCR to calculate their standardized total risk-weighted assets by 1 July 2020 and (ii) allow non-advanced-approaches banking organizations to used either SA-CCR or CEM when calculating standardized total risk-weighted assets.  Comments on the proposed rule are due 60 days after its publication in the Federal Register

Fed and Other Agencies Release Proposals Regarding the Application of Prudential Standards to Large Banks

On 31 October, the Fed issued a proposed rule that would tailor the application of prudential standards to U.S. bank holding companies and apply enhanced standards to certain large savings and loan holding companies.  The proposal would “amend certain prudential standards, including standards relating to liquidity risk management, stress testing, and single-counterparty credit limits, to reflect the risk profiles of banking organizations under each proposed category of standards and would apply prudential standards to certain large savings and loan holding companies using the same categories.”  The categories are:

·        Category I: U.S. global systemically important banks would remain subject to the “most stringent standards.”

·        Category II: Banks of global scale, with $700 billion or more in total assets or $75 billion or more in cross-jurisdictional activity, would be subject to stricter prudential standards applicable to “very large internationally active banking organizations” and based on non-bank assets, short-term wholesale funding, or off-balance sheet exposures.

·        Category III: Banks with $250 billion or more in assets, or firms with at least $100 billion in assets that surpass certain risk thresholds, would be subject to enhanced standards tailored to the risk profile of these banks.

·        Category IV: Most banks with $100 billion to $250 billion in total assets would be subject to reduced requirements such as not being subject to standardized liquidity requirements and having significantly reduced stress-testing obligations.

On 31 October, the Fed, FDIC, and OCC separately issued a joint proposal that would tailor the application of the agencies’ capital and liquidity rules to large U.S. bank organizations.  The joint agency proposal would tailor requirements under the agencies’ regulatory capital rule, the liquidity coverage ratio rule, and the proposed net stable funding ratio rule for large U.S. banking organizations using the same categories described above.  Comments on both proposed rules are due by 22 January 2019. 

OCC Issues Request for Comment on Revisions to Annual Stress Tests

On 31 October, the OCC released a request for comment concerning a revision to a regulatory reporting requirement for national banks and federal savings associations with total consolidated assets of $100 billion or more.  The OCC is proposing to “accommodate the revised asset threshold necessitated” by the Economic Growth, Regulatory Relief, and Consumer Protection Act and “revise its reporting requirements to mirror the [Fed’s] proposed FR Y-14A” form.  FR Y-14A is used by covered institutions when they conduct their Comprehensive Capital Analysis and Review (“CCAR”) stress tests.  Comments on the proposed revisions are due by 31 December 2018. 

Fed Finalizes New Supervisory Rating System for Large Financial Institutions

On 2 November, the Fed announced that it had finalized a new supervisory rating system for large financial institutions that “is aligned with the core areas most important to supporting a large firm’s safety and soundness and U.S. financial stability.”  The new rating system will (i) “apply to all domestic bank holding companies and non-insurance, non-commercial savings and loan holding companies with $100 billion or more in total consolidated assets, which is a change from the $50 billion threshold originally proposed,” and (ii) “apply to U.S. intermediate holding companies of foreign banking organizations with $50 billion or more in total consolidated assets as proposed.” Under the new rating system, the Fed will assign component ratings for capital planning and positions, liquidity risk management and positions, and governance and controls, and the Fed will introduce a new rating scale.  The final rule is effective on 1 February 2019. 


·       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.

·        Nov. 7: CFTC Chairman Christopher Giancarlo will deliver the keynote speech at Fintech Week. 

·        Nov. 8: CFTC Chairman Christopher Giancarlo will participate on a panel at OSC Dialogue 2018: Market Evolution Regulatory Change.

·        Nov. 12: The LabCFTC Staff will hold its 1st International FinTech Office Hours.

Ianthe Zabel
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