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US Regulatory Update


U.S. Senate Committee on Appropriations Approves FY2019 Financial Services Funding Bill

On 21 June, the U.S. Senate Committee on Appropriations approved by unanimous consent S. 3107, the  Financial Services and General Government Appropriations Act, 2019.  The bill would provide $1.658 billion of funding for the Securities and Exchange Commission (“SEC”) (an increase of $6 million from FY 2018) and $281.5 million of funding for the Commodity Futures Trading Commission (“CFTC”) (an increase of $32.5 million from FY 2018 and at the level requested by the CFTC). 

U.S. House Committee on Financial Services Hearing Analyzing the Tax Cuts and Jobs Act

On 20 June, the U.S. House Committee on Financial Services held a hearing entitled “Empowering a Pro-Growth Economy by Cutting Taxes and Regulatory Red Tape.” Testifying at the hearing were Karen Kerrigan, President and CEO of the Small Business & Entrepreneurship Council, Lori Miles-Olund, on behalf of the National Association of Manufacturers, Ford Sasser III, on behalf of the Texas Bankers Association, Damon A. Silvers, Policy Director and Special Counsel for the American Federation of Labor and Congress of Industrial Organizations, and Paul Schott Stevens, President and CEO of the Investment Company Institute. Chairman Jeb Hensarling (R-TX) championed the Tax Cuts and Jobs Act as legislation that will “ensure that the burden of [the U.S.] regulatory infrastructure is minimized so that we can have economic growth.”  While some Democratic members were critical of the Act’s effectiveness, stating that almost all of the money companies are seeing from the tax cuts is going to stock buybacks, Mr. Stevens stated that buybacks are helping investors by returning wealth to them in a more efficient way.  When asked about how the Tax Cuts and Jobs Act has helped the economy thus far, Ms. Kerrigan stated that the Act has provided many different benefits, particularly with regards to debt and equity crowd funding for startups. 

U.S. Senate Committee on Banking Hearing Regarding Anti-Money Laundering

On 20 June, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Combating Money Laundering and Other Forms of Illicit Finance: How Criminal Organizations Launder Money and Innovative Techniques for Fighting Them.” Testifying at the hearing were Dennis Lormel, President and CEO of DML Associates and former Chief of the FBI Financial Crimes Program, Tracy Woodrow, Senior Vice President and Bank Secrecy Act Officer for M&T Bank, and Chip Poncy, President and Co-founder of the Financial Integrity Network. The participants discussed, among other topics: (i) how criminal organizations launder money and avoid detection by financial institutions; (ii) how financial institutions can more effectively address money laundering; and (iii) potential reforms to the current anti-money laundering regime and the Bank Secrecy Act.

U.S. House Committee on Financial Services Advances Three Bills

On 21 June, the following three bills were approved by the U.S. House Committee on Financial Services:

·        H.R. 5970, the Modernizing Disclosures for Investors Act, which passed by a vote of 56-0 and would require the SEC to send to Congress a report on the SEC’s Form 10-Q, including giving emerging growth companies (“EGCs”) the option to use a less burdensome alternative form.

·        H.R. 6130, the Helping Startups Continue to Grow Act, which passed by a vote of 32-24 and would extend certain financial reporting “on-ramps” for ECGs by providing EGCs an additional five years of exemptions from certain disclosure requirements.

·        H.R. 6139, the Improving Investment Research for Small and Emerging Issuers Act, which passed by a vote of 58-0 and would require the SEC to report to Congress on issues relating to the lack of investment research coverage of small issuers, including EGCs and pre-IPO companies.



U.S. District Court for the Southern District of New York Rules the Structure of the Consumer Financial Protection Bureau Unconstitutional

On 21 June, the U.S. District Court for the Southern District of New York issued a decision in Consumer Financial Protection Bureau v. RD Legal Funding, LLC holding that the CFPB is “unconstitutionally structured.” In its decision, the U.S. District Court partially adopted the dissenting opinions of Judges Brett Kavanaugh and Karen LeCraft in the Court of Appeals for the District of Columbia Circuit’s decision in PHH Corp. v. CFPB (an earlier decision that went in favor of the CFPB) and affirmed that the CFPB “is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.” The U.S. District Court also rejected the government’s argument that a Notice of Ratification (filed on 11 May 2018), which sought to address the for-cause removal provisions of the CFPB’s enabling statute, cured any issues relating to the structure of the CFPB. 

U.S. Fifth Circuit Court of Appeals Issues Mandate Vacating the Fiduciary Duty Rule

On 21 June, the U.S. Fifth Circuit Court of Appeals issued a mandate formally vacating the Department of Labor’s (“DOL”) fiduciary duty rule, which the Court had vacated in a decision on 15 March 2018. In its mandate to vacate the rule, the U.S. Fifth Circuit Court of Appeals stated that it had found merit in several of the challenges brought by the nine financial industry trade groups, including the U.S. Chamber of Commerce and SIFMA, against the DOL, including: (i) the Rule’s inconsistency with the governing statutes; (ii) DOL’s overreaching to regulate services and providers beyond its authority; (iii) DOL’s imposition of legally unauthorized contract terms to enforce the new regulations; (iv) First Amendment violations; and (v) the Rule’s arbitrary and capricious treatment of variable and fixed indexed annuities.

Supreme Court Rules SEC’s Appointment Process for Administrative Law Judges Unconstitutional

On 21 June, the Supreme Court issued a decision in Lucia v. SEC holding that the SEC’s administrative law judges (“ALJs”) are “Officers of the United States” and that the SEC’s process for appointing ALJs was unconstitutional when the case was brought against Lucia. Under the Appointments Clause of the U.S. Constitution, Officers of the United States may only be appointed by the President, “Courts of Law,” or “Heads of Departments.” While the SEC is considered a Head of Department, the SEC had delegated the appointment process to its staff members. The Supreme Court’s decision, however, will not affect future decisions made by SEC ALJs as the SEC issued an order on 30 November 2017 ratifying its prior appointment of its ALJs, but might affect other decisions made by the ALJs prior to 30 November 2017.


U.S. House Committee on Financial Services Hearing on SEC Oversight

On 21 June, the U.S. House Committee on Financial Services held a hearing entitled “Oversight of the U.S. Securities and Exchange Commission.” Several committee members asked SEC Chairman Jay Clayton about the SEC’s proposed Regulation Best Interest, and Chairman Clayton replied that both the broker-dealer model and the investment advisor model will require that the interests of clients be put over those of financial professionals.  When questioned by Rep. Ann Wagner (R-MO) whether the SEC would extend the 7 August 2018 comment period deadline for the proposed Regulation Best Interest, Chairman Clayton answered that he believes the “lengthy” 90-day comment period would be adequate to address the issues identified but added that “[we’ll] see in August.”  Chairman Clayton also explained that the proposed Form CRS will provide investors with a better understanding of their relationship with their financial professionals.  Chairman Clayton stated that all comments to the proposals are public and that he anticipates making public the results of investor testing on these proposals.  Responding to questions on capital formation, Chairman Clayton said that while the current availability of private capital is strong, the public capital markets are not.  He further explained that while this is a concern, he wants to ensure that private capital is not negatively impacted at the expense of boosting the public markets.  When asked about the Consolidated Audit Trail (“CAT”), Chairman Clayton stated that the SEC has received a draft work plan from the self-regulatory organizations and that progress is being made on the implementation of the CAT.  Rep. Ed Royce (R-CA) asked Chairman Clayton about his concerns over the duopoly of proxy advisors and their impact on the proxy process.  Chairman Clayton replied that the duopoly is the result of economies of scale and are an important aspect of the public markets, but that the SEC will monitor closely the role proxy advisors play.

SEC Publishes for Comment Draft Strategic Plan for 2018-2022

On 18 June, the SEC published for public comment its draft strategic plan for fiscal years 2018-2022, which will be used to guide the SEC’s regulatory priorities during that period. According to the draft plan, the SEC’s three main goals will be: (i) focusing on the long-term interests of main street investors; (ii) recognizing significant developments and trends in the evolving capital markets and adjusting the SEC’s efforts to ensure that the SEC is effectively allocating its resources to address those developments; and (iii) elevating the SEC’s performance by enhancing its analytical capabilities and human capital development.  There is a 60-day comment period for the draft strategic plan.

Remarks of SEC Chairman Jay Clayton on Observations on Culture at Financial Institutions and the SEC

On 18 June, SEC Chairman Jay Clayton delivered remarks before the New York Federal Reserve regarding the importance of company culture.  Chairman Clayton defined culture as “a collection of countless internal and external actions,” and stated that the compliance programs, policies and procedures, training, and personnel decisions have a major impact on reinforcing cultural objectives. Chairman Clayton stated that to effectively manage a business on a day-to-day basis and over the long term, “management needs to know what the culture of the organization is today, including key drivers of that culture.”  From a regulatory perspective, Chairman Clayton stated that firms and regulators are “trying to row the same boat in the same direction,” but that agreeing on how to enhance a firm’s culture will be “very difficult” if there is a disconnect between what the regulator and what management views a firm’s culture to be.

Remarks of SEC Commissioner Robert Jackson Regarding Cybersecurity Disclosure

On 21 June, Forbes reported that SEC Commissioner Robert Jackson delivered remarks before the Society for Corporate Governance’s National Conference regarding cybersecurity disclosures.  Commissioner Jackson stated that investors are not receiving the necessary cybersecurity disclosures from companies and urged companies to provide investors with relevant information “promptly.”  Commissioner Jackson, however, did not clarify what additional cybersecurity information needed to be provided to investors nor what the cybersecurity disclosure best practices are.  Commissioner Jackson also stated that he is open to industry input on establishing cybersecurity best practices and reiterated that cybersecurity is “the most important corporate governance issue” the industry faces. 


Remarks of CFTC Commissioner Brian Quintenz Regarding Regulatory Deference

On 21 June, CFTC Commissioner Quintenz delivered remarks before the Institute of International Bankers Membership Luncheon regarding regulatory deference and the global derivatives market. In his remarks, Commissioner Quintenz rejected recent criticisms that a deference-based approach to cross-border regulation would incentivize jurisdictions to compete in a regulatory “race to the bottom” to attract more business for themselves.  Instead, he argued that market participants “seek neither the least nor the most regulated marketplaces, but rather marketplaces that have the best balance of sensible, objective, and reliable regulation.”  He then discussed two areas of regulations where the CFTC “ultimately may not follow in lockstep with EU regulatory authorities,” namely: (i) algorithmic trading regulation and (ii) position limits.  Commissioner Quintenz also discussed central counterparty (“CCP”) equivalence and expressed concern over the EU’s recent decision to introduce legislation that could threaten the EU-US common approach regarding supervision of central counterparties, as established in the 2016 CFTC-European Commission CCP equivalence agreement.


o   26 June: Senate Banking Committee hearing entitled “Legislative Proposals to Increase Access to Capital.”

o   26 June: House Committee on Financial Services hearing entitled “International and Domestic Implications of De-Risking.”

o   27 June: House Committee on Financial Services markup of eight bills, including the Financial Technology Protection Act, which focuses on combatting terrorist and illicit use of digital currencies.  

o   28 June: Senate Banking Committee hearing entitled “Legislative Proposals to Examine Corporate Governance.”

o   28 June: SEC open meeting to discuss: (i) amendments to “smaller reporting company” definition; (ii) amendments to rules and forms regarding the use of inline XBRL filing of tagged data; (iii) issues regarding proposing a rule 6c-11 that would permit certain exchange-traded funds to operate without first obtaining an exemptive order from the Commission; (iv) amendments to Form N-PORT and Form N-1A related to disclosures of liquidity risk management for open-end management investment companies; (v) amendments to the SEC’s whistleblower program rules; and (vi) issues regarding whether the SEC should enter into a revised memorandum of understanding with the CFTC.

o   9 July: Comments due on the SEC’s proposed rule regarding “covered investment fund research reports.”

Ianthe Zabel
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