US Regulatory Update
U.S. House Committee on Financial Services Passes 15 Bills
On 18 January, the U.S. House Committee on Financial Services announced through a press release that it passed 15 bills, posting vote totals and summaries for each, including:
- H.R. 3746, the Business of Insurance Regulatory Reform Act of 2017, which passed by a vote of 37-18, and according to the press release, would amend the Consumer Financial Protection Act of 2010 “to exempt from the CFPB’s enforcement persons engaged in the business of insurance and who are already regulated by a State insurance regulator.”
- H.R. 4061, the Financial Stability Oversight Council Improvement Act, which passed by a vote of 45-10, and according to the press release, would amend the Dodd-Frank Act to require the FSOC, “when determining whether to subject a U.S. or a foreign nonbank financial company to supervision by the Federal Reserve, to consider the appropriateness of imposing heightened prudential standards as opposed to other forms of regulation to mitigate identified risks to U.S. financial stability.” The bill is based on Section 151 of the Financial CHOICE Act of 2017.
- H.R. 4566, the Alleviating Stress Test Burdens to Help Investors Act, which passed by a vote of 47-8, and according to the press release, would exempt “nonbank financial institutions that are not under supervision by the Federal Reserve from the Dodd-Frank Act’s stress testing requirements” and provide the Federal Reserve “with the ability to limit stress testing requirements for nonbank financial institutions it may supervise.” The bill is based on Section 151 of the Financial CHOICE Act.
- H.R. 4785, the American Customer Information Protection Act, passed by a vote of 31-25, which, according to the press release, “prohibits the Consolidated Audit Trail . . . from accepting personally identifiable information . . . except where such information would apply to large traders.”
SIFI AND FINANCIAL STABILITY
U.S. Senate Committee on Banking, Housing, and Urban Affairs Nomination Hearing
On January 23, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the nomination of, among others, Thomas E. Workman to be an Independent Member of the FSOC with insurance expertise. When questioned by Committee Chairman Mike Crapo (R-ID) about how he envisions his role on the FSOC, Mr. Workman stated that: (i) there is a “continuing need” for more transparency in the process for designating non-banks as SIFIs; (ii) he supports more engagement and collaboration between the FSOC and the primary regulators of insurance companies during the designation process; and (iii) he supports considering cost-benefit analyses as part of the SIFI designation process. When questioned by Committee Chairman Crapo on his opinion regarding the current designation process, Mr. Workman stated that the recommendation put forth by the Department of Treasury’s November 2017 report for an “activities-based” or “industry-based” approach to assessing risk, which he notes the International Association of Insurance Supervisors has also adopted, “deserves consideration.” When questioned by Sen. Richard Shelby (R-AL) about whether banks and insurance companies are structured and operated differently and whether such differences should be considered as part of the SIFI designation process, Mr. Workman stated that insurance companies are “functionally different” than banks, particularly with regards to the duration of risk faced by the entities, and such differences should be considered as part of the SIFI designation process. When questioned by Sen. Catherine Cortez Masto (D-NV) about whether the FSOC should eliminate the non-bank SIFI designation process, Mr. Workman stated that, when making designations, the FSOC should “look at the market place, look at what the concerns may be,” and then engage primary regulators of potential non-bank designees.
U.S. Senate Committee on Banking, Housing, and Urban Affairs Hearing Entitled “the Financial Stability Oversight Council Annual Report to Congress”
On 30 January, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “the Financial Stability Oversight Council Annual Report to Congress.” U.S. Treasury Secretary Steven Mnuchin called upon the Senate to pass S. 2155, the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act, and testified on a number of issues, including, among others: (i) the designations of non-bank SIFIs; (ii) cybersecurity; (iii) the role of the Financial Stability Board (“FSB”) in U.S. financial regulation; and (iv) cryptocurrency.
o SIFI Designation: Ranking Member Sherrod Brown (D-OH) noted that the Treasury’s annual report recommended raising the threshold for determining whether a “shadow bank” poses systemic risk from $50 billion to $250 billion, and asked whether the FSOC would commit any resources to “investigating any shadow banks” under a $250 billion threshold. Treasury Secretary Mnuchin responded that the FSOC would not carry out such investigations and that there is a general consensus among the regulators that the threshold should be raised. Sen. Richard Shelby (R-AL) asked whether banks and insurance companies operate under two different models and should thus be viewed differently under the SIFI designation process. Treasury Secretary Mnuchin stated that banks and insurance companies have different liabilities and that insurers should be reviewed “carefully,” which he believes the FSOC has done. Sen. Jon Tester (D-MT) questioned whether the FSOC, in de-designating MetLife and AIG as SIFIs, had conducted research into the operations of these institutions and concluded that both no longer posed the level of systemic risk that warranted SIFI designations. Treasury Secretary Mnuchin stated that while AIG had been de-designated due to the significant decrease in the systemic risk that it posed, the decision to de-designate MetLife “had nothing to do with the risk of MetLife” but was made as a legal decision, and that MetLife “could be . . . subject to designation in the future.”
o Cybersecurity: Committee Chairman Crapo noted that the Treasury’s annual report identified cybersecurity as a potential vulnerability to U.S. financial stability. He questioned whether the FSOC has identified any “gaps or shortfalls in cybersecurity protection” and what steps can be taken to address those gaps or shortfalls. Treasury Secretary Mnuchin responded that he sees no “specific gaps today,” but noted that this is an area that requires continued vigilance and increased cooperation between the public and private sectors. Sen. Jack Reed (D-RI) questioned whether the Department of Treasury has adequate resources to address cybersecurity issues. Treasury Secretary Mnuchin stated that Treasury currently has enough staffing and resources but will not be “bashful” about requesting more when necessary.
o Role of the FSB: Sen. Tom Cotton (R-AR) expressed concerns that the FSB has “morphed” into a global regulatory body that utilizes its peer-review process to pressure U.S. companies into adopting its standards. He questioned whether FSB standards were voluntary or binding. Treasury Secretary Mnuchin stated that such standards are voluntary and meant to create a leveled playing field, but are not binding on individual countries. Sen. Cotton noted that on July 13, 2013, the FSB designated three U.S. insurers (AIG, MetLife, and Prudential) as globally systemically important insurers (“G-SIIs”), even though only AIG had been designated as a SIFI by the FSOC at that time. He further noted that the FSB operates by consensus and that the former Treasury Secretary and former Federal Reserve Chair sat on the board of the FSB and were members of the FSOC. He questioned how the subsequent decision by the FSOC to designate MetLife and Prudential as SIFIs could be seen as objective when the former Treasury Secretary and former Fed Chair had already decided to designate MetLife and Prudential as systemically important through their decisions at the FSB, and whether the subsequent decision by FSOC to designate MetLife and Prudential was just a “show-trial.” Treasury Secretary Mnuchin stated that he understood Sen. Cotton’s concerns and the “fundamental” need for better transparency surrounding the SIFI designation process. Sen. Cotton questioned whether such an incident would occur again. Treasury Secretary Mnuchin stated that it would not. Sen. Mike Rounds (R-SD) expressed concerns similar to those highlighted by Sen. Cotton and questioned whether the FSB will play any future role in the SIFI designation process. Treasury Secretary Mnuchin stated that he does not foresee FSB playing any role in future SIFI designations.
o Cryptocurrency: Sen. Rounds questioned whether cryptocurrencies posed a threat to the financial stability of U.S. financial markets. Treasury Secretary Mnuchin stated that he does not see cryptocurrencies as a threat to financial stability but as a very important topic to address. He explained that his primary concerns are to ensure that cryptocurrencies are not being used by the “bad guys” to facilitate money laundering and other related activities and to ensure that consumers understand issues related to cryptocurrencies. Sen. Reed questioned how closely the Department of Treasury has been working with the intelligence agencies in addressing issues relating to cryptocurrency and anti-money laundering. Treasury Secretary Mnuchin stated that the Department has very close relationships with the intelligence agencies, that he meets with CIA Director Mike Pompeo on a “regular basis,” and that there are “daily interactions” with intelligence agencies at “all levels” of the Department.
Republican Lawmakers Send Letter Urging President to Clarify FSB Standards
On 18 January, six Republican Senators, including U.S. Senate Banking Committee Chairman Mike Crapo, addressed a letter to President Donald Trump asking him to “formally clarify that the standards or rules developed by the FSB are advisory in nature, and not binding on the United States or U.S. businesses.” In the letter, the Senators expressed their concern that “the FSB has been driving a significant amount of U.S. policymaking regarding financial regulation.”
Federal Appeals Court Dismisses MetLife SIFI Designation Case
On 23 January, the Wall Street Journal reported that the U.S. Court of Appeals for the District of Columbia dismissed a lawsuit involving MetLife Inc.’s designation as a SIFI. According to the article, this was “the last step in the insurer’s path to shedding the label.” The decision was made in response to an announcement from the Trump Administration on 18 January 2018 that it would end the government’s appeal of the lawsuit. But, as noted in the Wall Street Journal, MetLife and FSOC also “agreed that they would also ask the court to vacate the part of Judge Collyer’s decision that found [FSOC] didn’t consider the costs of heavier regulation on the company.”
SEC & SECURITIES
SEC Adopts Rule on Treatment of Securities-Based Swaps Communications
On 5 January, the SEC adopted Rule 135d under the Securities Act of 1933 (the “Act”), providing that certain communications involving securities-based swaps (“SBS”) will not be considered “offers” for purposes of Section 5 of the Act, which requires the registration of any offer or sale of a security. According to the final rule, “the publication or distribution of price quotes that relate to [SBSs] . . . may be purchased only by persons who are eligible contract participants” and “the publication or distribution of research reports . . . can only be purchased by eligible contract participants” if: (i) “the research is published in the ordinary course of the broker-dealer or SBS dealer's business”; and (ii) “the publication is not the commencement of research by the broker-dealer or SBS dealer on the relevant issuer of the underlying security.” The new rule came into effect on 16 January 2018, when it was published in the Federal Register.
SEC Chairman Delivers Opening Remarks at the Securities Regulation Institute
On 22 January, SEC Chairman Jay Clayton delivered remarks before the Securities Regulation Institute (via videoconference as a result of the government shutdown). He presented his “expectations for market professionals, particularly when dealing with new products or new forms of old products” and addressed “the SEC’s approach to remaining Dodd-Frank rulemaking mandates.” Chairman Clayton explained that Dodd-Frank Act rules concerning security-based swaps, executive compensation, disclosure rules, and other regulations remain on the SEC’s agenda. He emphasized his intent to complete the rules mandated by Congress, adding that “[the SEC] will have to be flexible in timing, in sequence, and in content, because [of] . . . factors beyond [its] control that can dictate how to apply the agency’s limited resources.”
SEC Invites Entities to Voluntarily Submit Self-Assessments of Diversity Policies and Practices
On 25 January, the SEC’s Office of Minority and Women Inclusion (“OMWI”) introduced its “Diversity Assessment Report for Entities Regulated by the SEC.” According to the press release, the report is “designed to help regulated entities conduct self-assessments of their diversity policies and practices,” as envisioned by the Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies, and “provides these entities with a template for submitting information about their self-assessments to OMWI.” The use of Joint Standards, self-assessments, and the submission of information to OMWI are all voluntary.
CFTC & DERIVATIVES
CFTC Chairman Delivers Remarks on Bitcoin Futures
On 19 January, CFTC Chairman J. Christopher Giancarlo delivered remarks before the American Bar Association Derivatives and Futures Section Conference where he announced that the CFTC is exploring whether statutory support exists for the CFTC to codify its seven-step “’heightened review” process for virtual currency derivatives, which was recently used to determine that new Bitcoin derivatives complied with CFTC rules on designated contract markets (“DCMs”), including “ensuring that a product is not readily susceptible to manipulation and monitoring the cash-settlement process under the staff’s ‘heightened review’ process for virtual currencies.” According to Chairman Giancarlo, the seventh step, “setting high initial and maintenance margins . . . was designed to ensure adequate collateral coverage in reaction to the underlying volatility of Bitcoin.” Chairman Giancarlo also noted that he is instructing staff to add an eighth element to the checklist: DCMs “will be asked to disclose to the CFTC what steps they have taken in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties.” He concluded by emphasizing his belief that “the real issues” are: (i) “whether a DCM’s responsibility under the CEA and Commission regulations . . . is sufficiently robust”; and (ii) whether a DCO “has fulfilled its responsibility under the CEA and Commission regulations to ensure that virtual currency derivatives are sufficiently margined.”
U.S. House Committee on Financial Services Financial Institutions and Consumer Credit Subcommittee Hearing on Fintech
On 30 January, the U.S. House Committee on Financial Services Financial Institutions and Consumer Credit Subcommittee held a hearing entitled “Examining Opportunities and Challenges in the Financial Technology (Fintech) Marketplace.” The individuals who testified at the hearing were: Nathaniel Hoopes, Executive Director of Marketplace Lending Association; Brian Knight, Senior Research Fellow at The Mercatus Center at George Mason University; Brian Peters, Executive Director of Financial Innovation Now; Andrew Smith, Partner at Covington and Burling, LLP; and Adam J. Levitin, Professor of Law at Georgetown University Law Center. The hearing focused on issues related to the regulation of FinTech. When questioned by Subcommittee Chairman Blaine Luetkemeyer (R-MO) about how the U.S. can foster innovation and keep a level playing field while protecting consumers, Mr. Knight supported the establishment of a “regulatory sandbox,” but warned that it should not be a place where only favored firms can gain access and attain a competitive advantage. When questioned by Subcommittee Vice Chairman Keith J. Rothfus (R-PA) about how the U.S. compares with other countries with respect to FinTech regulation, Mr. Knight stated that the U.S. is a “mixed bag,” noting that while the U.K. is generally recognized as the leader in FinTech regulation (due, in part, to its centralized system), many U.S. regulators have made concerted efforts to become more “innovation friendly.” When questioned by Subcommittee Vice Chairman Rothfus as to what are the chief regulatory impediments facing FinTech in the U.S., Mr. Peters responded that many of the financial laws that govern our systems were written before the internet and that the fractured state-by-state regulatory environment is very tough to navigate. When questioned by Rep. David Scott (D-GA) about considerations related to the U.S.’s state-by-state regulatory approach in certain areas of FinTech, Mr. Smith responded that such a patchwork of regulation can lead to higher costs and stifle innovation. He noted that building a national platform within the U.S.’s state-by-state regulatory system could be so expensive that it prevents new firms from doing so.
CFTC and SEC Chairmen Publish Joint Op-Ed on Market Integrity and Virtual Currencies
On 25 January, SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo wrote an op-ed for the Wall Street Journal focused on the role of regulators in promoting market integrity and transparency, in the context of distributed ledger technology (“DLT”). The Chairmen remarked, “today we are seeing substantial DLT-related market activity that shows little or no regard to our proven regulatory approach” and expressed concern regarding whether regulators’ “historical approach to the regulation of currency transactions is appropriate for the cryptocurrency markets.” In the op-ed, they explained that traditionally, check-cashing and money-transmission services are regulated at the state level and many virtual currency trading platforms, which often fall into this regulatory category, are not subject to direct SEC or CFTC oversight. The Chairmen concluded that they “would support policy efforts to revisit these frameworks” and “will continue to work together [with other federal and state regulators] to bring transparency and integrity to these markets and, importantly, to deter and prosecute fraud and abuse.”
Joint Statement by SEC and CFTC Enforcement Directors Regarding Virtual Currency Enforcement Actions
On 19 January, SEC Co-Enforcement Directors Stephanie Avakian and Steven Peikin and CFTC Enforcement Director James McDonald issued a joint statement on enforcement actions concerning virtual currencies, coins, tokens, and related instruments. The statement noted that “[w]hen market participants engage in fraud under the guise of offering digital instruments . . . the SEC and the CFTC will look beyond form [to] examine the substance of the activity and prosecute violations of the federal securities and commodities laws.”
UPCOMING EVENTS AND DEADLINES
- 26 February: comments are due on the New York State Department of Financial Services’ proposed regulation to establish a “best interest” standard for entities licensed to sell life insurance and annuity products.
- 15 February: CFTC Chairman J. Christopher Giancarlo will testify before the U.S. Senate Committee on Agriculture, Nutrition & Forestry on the State of the CFTC: Examining Pending Rules, Cryptocurrency Regulation, and Cross-Border Agreements.
- 11 March: comments are due on the SEC’s request for comments on the use and necessity of the information collected by Form PF.
- 15 March: comments are due on the Federal Reserve Board’s proposed guidance clarifying its supervisory expectations related to risk management for large financial institutions.