US Regulatory Update
Securities and Exchange Commission, Commodities and Futures Trading Commission, and Office of the Comptroller of Currency Join Federal Reserve Board and Federal Deposit Insurance Corporation in Proposing Changes to Volcker Rule
On 4 and 5 June, the Securities and Exchange Commission (“SEC”), Commodities and Futures Trading Commission (“CFTC”), and Office of the Comptroller of the Currency announced proposed amendments (“Proposed Rule”) aimed at simplifying and tailoring the Volcker Rule, which limits the investment and trading activity of banks. The Federal Reserve Board and Federal Deposit Insurance Corporation already had approved the proposed amendments. The Proposed Rule divides banks into three tiers for compliance purposes: (i) banks with trading assets and liabilities in excess of $10 million would continue to be subject to comprehensive compliance requirements, (ii) banks with trading assets and liabilities between $1 billion and $10 billion would be subject to reduced compliance requirements, and (iii) all other banks would have a “rebuttable presumption of compliance” and thus not be required to establish or maintain a separate Volker Rule compliance program unless directed to do so by a regulator. The Proposed Rule contains several other important changes, one of the most significant being modifying the definition of “trading account” so that it contains an accounting-based prong instead of the current intent-based prong. There is a 60-day comment period for the Proposed Rule.
U.S. House Committee on Financial Services Advances Six Bills
On 7 June, the following six bills were approved by the U.S. House Committee on Financial Services:
o H.R. 5783, the Cooperate with Law Enforcement Agencies and Watch Act of 2018, which passed by a vote of 55-0 and would provide a safe harbor for financial institutions that continue to maintain a problematic customer account at the request of a Federal or State or tribal or local law enforcement agency;
o H.R. 5877, the Main Street Growth Act, which passed by a vote of 56-0 and would amend the Securities Exchange Act of 1934 to allow for the registration of “venture exchanges” to provide a venue for the trading of securities of qualifying companies (generally, early-stage growth and emerging growth companies);
o H.R. 5054, the Small Company Disclosure Simplification Act of 2018, which passed by a vote of 32-23 and would provide a voluntary exemption for emerging growth companies and other smaller companies from the requirements to use Extensible Business Reporting Language (“xBRL”) for financial statements and other periodic reporting;
o H.R. 5756, which passed by a vote of 34-22 and would require the SEC to adjust certain resubmission thresholds for shareholder proposals;
o H.R. 3861, the Federal Insurance Office Reform Act of 2017, which passed by a vote of 36-21 and would reform the Federal Insurance Office of the Department of the Treasury by, among other things, limiting its role largely to international matters; and
o H.R. 4557, the Reforming Disaster Recovery Act of 2017, which passed by a vote of 53-3 and would provide guidance and standards governing how federal disaster funds are distributed and accounted for.
Senate Committee on Appropriations Hearing Regarding CFTC and SEC FY2019 Budget Requests
On 5 June, the Senate Committee on Appropriations Subcommittee on Financial Services and General Government held a hearing entitled “Review of the FY2019 Budget Request for the U.S. Commodity Futures Trading Commission & the SEC.” When asked about what he expected to come out of the SEC’s proposed Regulation Best Interest, Chairman Clayton stated that he hopes the SEC can have candid conversations with investment professionals as they assess the proposed rule and that while he cannot provide a specific timeline at this time, the agency would not “take forever” issuing the final rule. Subcommittee Chairman Lankford asked CFTC Chairman Giancarlo to walk the committee through his recent white paper on swaps regulation and the de minimis threshold. Chairman Giancarlo said that the swaps rules in Title VII of the Dodd-Frank Act could be improved by focusing on the net positions of swaps transactions as opposed to a transaction’s notional amount. Regarding the de minimis threshold, Chairman Giancarlo said the CFTC determined that dropping the threshold from $8 billion to $3 billion would harm small regional banks, agricultural co-ops, and power utilities by forcing them to comply with swap dealer registration. When asked about the Volker Rule, SEC Chairman Clayton said the rule’s regulatory burden was out of proportion to the total trading activity of small banks, and CFTC Chairman Giancarlo said the contemplated Volcker Rule changes will be narrow and moderate. Regarding the e-delivery of mutual fund documents, SEC Chairman Clayton defended the changes to Rule 30e-3, saying the modified rule still requires mutual funds to provide extensive notice and opportunity for investors to opt-in to receiving paper communications.
House Committee on Financial Services Hearing Regarding Reforms of Consumer Financial Protection Bureau
On 6 June, the House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Improving Transparency and Accountability at the Bureau of Consumer Financial Protection.” The central purpose of the hearing was to discuss recommendations to reform the Bureau of Consumer Financial Protection (the “Bureau”) that were included in a report issued by the Bureau to the President and the Congress in April 2018. In that report, the Bureau’s Acting Director, Mick Mulvaney, requested four changes: (i) fund the Bureau through Congressional Appropriations, (ii) require legislative approval of major Bureau rules, (iii) ensure that the Bureau Director answers to the President in the exercise of executive authority, and (iv) create an independent Inspector General for the Bureau.
SEC & SECURITIES
SEC Open Meeting
On 5 June, the SEC held an open meeting and: (i) voted to adopt a final rule to provide certain registered investment companies (“funds”) with an optional method to satisfy their obligations to transmit shareholder reports; (ii) issued a request for public comments on enhancing fund disclosures to improve the investor experience; (iii) issued a request for public comments on processing fees intermediaries charge for forwarding fund materials; and (iv) voted to adopt a proposed rule to amend the Volcker Rule.
o Transmitting Shareholder Reports: The SEC voted 4-1 to adopt a final rule that allows certain funds to satisfy their obligations to transmit shareholder reports by making them publicly available on a website and free of charge. The rule, however, provides investors the right to opt-in to receiving the full reports in paper through the mail free-of-charge and requires funds to provide extensive notice and opportunity for investors to opt-in to paper communications, including providing two years of notice to shareholders if a fund seeks to rely on the rule as of 1 January 2021. The rule will become effective on 1 January 2019 and funds may begin providing the shareholder notice at such time so that they can begin relying on the rule on 1 January 2021. Funds offered between 1 January 2019 and 31 December 2020 may rely on the rule if they begin providing notice to shareholders on the date their shares are first publicly offered. Funds offered after 1 January 2021 will be able to rely on the rule without providing any notice.
o Enhancing Fund Disclosures: The SEC issued a request for comments on how investors use disclosures and how funds can improve disclosures to enhance investor investment decision-making. Specifically, the SEC is seeking comments regarding the “delivery, design, and content of fund disclosures.” The comment period closes on 31 October 2018.
o Processing Fees: The SEC issued a request for comments on the “framework under which intermediaries may charge fees for distributing certain non-proxy disclosure materials to fund investors, such as shareholder reports and prospectuses . . . particularly where those fees may be borne by the fund and, in turn, its investors.” The comment period closes on 31 October 2018.
o Volcker Rule: The SEC voted 3-2 in favor of the proposed amendments to the Volcker Rule referenced above, with Commissioners Stein and Jackson dissenting.
Remarks of SEC Chairman Jay Clayton on Initial Coin Offerings
On 6 June, SEC Chairman Clayton delivered remarks at the Sandler O’Neill Global Exchange and Brokerage Conference regarding initial coin offerings (“ICOs”). Chairman Clayton said that companies raising money through digital tokens deserve closer attention because the SEC has already observed examples of fraud and fraudsters leaving the U.S. after persuading investors to back their ICOs. He emphasized that his goal is to “protect the integrity of the market” and to ensure bad actors do not get away.
Remarks of SEC Chairman Jay Clayton on CNBC Regarding Cryptocurrencies
On 6 June, SEC Chairman Clayton appeared on CNBC to discuss the regulation of cryptocurrencies. Chairman Clayton stated that cryptocurrencies like Bitcoin are not securities because they act as replacements for U.S. dollars or other fiat currencies. Conversely, products such as tokens are considered securities, and the issuances of tokens via ICOs and the trading of tokens warrant SEC registration and oversight. He also said the SEC will not advocate for amending the statutory definition of “security” because a change is unnecessary, and the traditional definition has “worked for a long time.”
MSRB Request for Comments on Retrospective Review of 2012 Interpretive Notice Concerning the Application of MSRB Rule G-17 to Underwriters of Municipal Securities
On 5 June, the Municipal Securities Rulemaking Board (“MSRB”) issued a notice requesting comments on interpretive guidance it issued in 2012 on the application of MSRB Rule G-17, regarding the duties underwriters of municipal securities owe to issuers (“2012 Guidance”).” Having received concerns from market participants through informal feedback that underwriters must disclose duplicative and large volumes of disclosures to issuers of municipal securities under the 2012 Guidance, the MSRB is requesting comments on how underwriters currently satisfy the disclosure requirements under the 2012 Guidance, the costs and burdens of complying with the 2012 Guidance, and whether the 2012 Guidance should be amended, and if so, how. The comment period closes on 6 August 2018.
CFTC & DERIVATIVES
CFTC Open Meeting
On 4 June, the CFTC held an open meeting and voted to adopt: (i) a final rule amending the Commission’s rules relating to access to swap dealer data held by swap data repositories (“SDRs”); (ii) a proposed rule regarding the swap dealer registration de minimis exception; and (iii) a proposed rule to amend the Volcker Rule.
o Access to Swap Dealer Data: The CFTC voted unanimously to adopt a final rule that will: (i) repeal the SDR indemnification requirement under the Commodity Exchange Act (“CEA”); (ii) modify the CEA by specifying that “swap” data—as opposed to “all” data—must be provided to certain domestic authorities and any other entities that the CFTC determines to be appropriate; (iii) add a new category of “other foreign authorities” to the CEA’s non-exclusive list of persons that the CFTC may determine to be appropriate SDR swap data recipients; and (iv) amend the CFTC’s rules regarding SDRs’ granting access to swap data to certain foreign and domestic authorities .
o De Minimis Exception: The CFTC voted 2-1 to propose a rule that would: (i) set the swap dealer registration de minimis exception threshold at $8 billion, which was originally set to decrease to $3 billion on 31 December 2018; (ii) exempt certain swap-dealing activity from being considered for the purposes of the de minimis threshold; and (iii) grant the CFTC the authority to “calculate the notional amount for any group, category, type, or class of swaps.” In addition, the CFTC is requesting comments on certain other calculation issues related to the de minimis exception. The comment period for the proposed rule closes 60 days after publication in the Federal Register.
o Volcker Rule: The CFTC voted 2-1 in favor of the proposed amendments to the Volcker Rule referenced above. In his opening statement, CFTC Chairman Giancarlo stated that the proposed amendments would address a “number of target areas of widespread concern,” including: (i) “tailor[ing] the application of the Volcker Rule to a firm’s risk profile and size and scope of trading activities”; (ii) “streamlin[ing] and clarify[ing] for all banking entities certain definitions and requirements related to the proprietary trading prohibition and limitations on covered fund activities and investment”; and (iii) “address[ing] the implicit bias against market making in the current version of the Volcker Rule.”
o 12 June: the Senate Banking Committee will vote on the nominations of Richard Clarida to be Fed Vice Chairman and Michelle Bowman to be a Fed Governor.
o 13 June: the House Financial Services Committee will hold a hearing entitled “Financial Industry Regulation: the Office of the Comptroller of the Currency.”
o 13 June: the House Financial Services Committee will hold a hearing entitled “Ensuring Effectiveness, Fairness, and Transparency in Securities Law Enforcement.”
o 13 June: the SEC will hold an interactive event with investors at Georgia State University College of Law titled “Investing in America.”
o 14 June: the Senate Banking Committee will hold a hearing entitled “An Update from the Comptroller of the Currency.”
o 15 June: Treasury Secretary Steven Mnuchin will preside over an executive session of the Financial Stability Oversight Council to discuss: (i) potential amendments to the Council’s interpretive guidance regarding nonbank financial company designations; (ii) an application to the Council from a bank holding company or its successor under section 117 of the Dodd-Frank Act; and (iii) an update on the annual reevaluation of the designation of a nonbank financial company.