US Regulatory Update
House Committee on Appropriations Releases Fiscal Year 2019 Financial Services Bill
On 13 June, the House Committee on Appropriations passed, by a vote of 28-20, its fiscal year (“FY”) 2019 Financial Services and General Government Appropriations bill. The bill would, among other things: (i) provide the Securities and Exchange Commission (“SEC”) with $1.66 billion in funding ($201 million below FY 2018 due to “last year’s one-time costs associated with [General Services Administration] lease renewals”); (ii) prohibit the SEC from promulgating a rule requiring the disclosure of corporate political contributions; (iii) bring the Consumer Financial Protection Bureau (“CFPB”) under the annual appropriations process; (iv) amend the Consumer Financial Protection Act of 2010 to eliminate the “removal for cause” standard for dismissal of the CFPB’s Director; (v) establish criteria for Congressional review of CFPB rulemakings; (vi) mandate that the Financial Stability Oversight Council (“FSOC”) consider the “appropriateness of the imposition of prudential standards as opposed to other forms of regulation” in considering nonbank SIFI designations; and (vii) exempt non-bank financial institutions that are not supervised by the Federal Reserve from stress testing requirements.
House Financial Services Committee Hearing Regarding Comptroller of the Currency
On 13 June, the U.S. House Committee on Financial Services held a hearing entitled “Financial Industry Regulation: the Office of the Comptroller of the Currency” (“OCC”). Regarding the Volcker Rule, Comptroller Joseph Otting stated that increasing liquidity is important and that the Volcker Rule could impair liquidity. Regarding the Bank Secrecy Act/anti-money laundering compliance system, Comptroller Otting said that it is not certain the current system is having the intended results and that the most burdensome components of the current system consist of a number of suspicious activity reports that must be filed. Several members asked questions about the Community Reinvestment Act (“CRA”), and Comptroller Otting responded that there needs to be a “more objective” way to measure a bank’s success and that the definition of what qualifies as CRA activities should be expanded because the current definition is too narrow.
Senate Committee on Banking Hearing Regarding the Comptroller of the Currency
On 14 June, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Update from the Comptroller of the Currency.” Several Senators asked Comptroller Otting about the OCC’s review of banking sales practices and whether the OCC’s findings would be made public. Comptroller Otting stated that the review was completed at the end of 2017, but he would not commit to publicly releasing the report because it contains confidential information. Committee Chairman Mike Crapo (R-IN) asked if the OCC plains to provide guidance on how S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, will impact companies with total assets less than $100 billion. Otting replied that the OCC has created a “critical path” document to provide guidance to market participants and that resources have been allocated to support market participants in this area. Sen. Thom Tillis (R-NC) asked why the OCC opposes having the Board of Governors of the Federal Reserve (“Federal Reserve Board”) as the only regulator for Volcker Rule compliance and implementation. Comptroller Otting answered that the OCC needs a voice because nearly equal amounts of Volcker Rule-related activities occur in banks (which are overseen by the OCC) and bank-holding companies (which are overseen by the Federal Reserve).
U.S. House Committee on Financial Services Advances Four Bills
On 14 June, the following four bills were approved by the U.S. House Committee on Financial Services:
o H.R. 5749, the Options Markets Stability Act, which passed by a vote of 54-0 and would require the banking regulators to implement a risk-adjusted approach to value centrally-cleared listed options as they relate to capital rules and the calculation of a bank’s counterparty credit risk exposure
o H.R. 5953, the Building Up Independent Lives and Dreams Act (“BUILD Act”), which passed by a vote of 53-0 and would allow charitable organizations, such as Habitat for Humanity, that make certain types of mortgage loans to use simpler, pre-Dodd-Frank Act lending forms and disclosure statements.
o H.R. 6035, the Streamlining Communications for Investors Act, which passed by a vote of 31-23 and would direct the SEC to revise SEC Rule 163(c) to allow a well-known seasoned issuer (“WKSI”) to authorize an underwriter or dealer to act as its agent or representative in communicating about offerings of the issuer’s securities prior to the filing of a registration statement.
o H.R. 6069, the Fight Illicit Networks and Detect Trafficking Act, which passed by a vote of 53-0 and would require the Comptroller General of the U.S. to carry out a study on how virtual currencies and online marketplaces are used to “buy, sell, or facilitate the financing of goods or services associated with sex trafficking or drug trafficking, and for other purposes.”
Federal Reserve Board Adopts Final Rule to Establish Single-Counterparty Credit Limits
On 14 June, the Federal Reserve Board adopted a final rule to establish single-counterparty credit limits for bank holding companies and foreign banking institutions with $250 billion or more in total consolidated assets, including any U.S. intermediate holding company of such a foreign banking organization with $50 billion or more in total consolidated assets, and any bank holding company identified as a global systemically important bank holding company (“G-SIB”) under the Federal Reserve Board’s capital rules. The final rule establishes: (i) two primary credit exposure limits applicable to (1) U.S. G-SIBs and (2) any bank holding company with total consolidated assets of $250 billion or more; and (ii) three primary credit exposure limits applicable to (1) U.S intermediate holding companies with total assets of $50 billion or more, (2) U.S intermediate holding companies with total assets of $250 billion or more, and (3) U.S intermediate holding companies with total assets of $500 billion or more.
Rep. Blaine Leutkemeyer Letter Regarding Enforcement of Agency Guidance
On 13 June, Rep. Blaine Leutkemeyer (R-MO) sent a letter to the OCC, FDIC, National Credit Union Administration, CFPB, and SEC raising concerns over those agencies’ process of treating “guidance promulgated by [the] agencies . . . as though it was a rule,” which he referred to as “regulation by enforcement.” Rep. Leutkemeyer urged each of the agencies to: (i) “issue and publish a clear statement affirming that agency statements . . . that have not gone through notice and comment rulemaking do not establish binding legal standards, and thus shall not be the basis of enforcement actions or supervisory directives”; and (ii) educate the agencies’ examiners about the “use and role of guidance” and ensure that such examiners are “held accountable when guidance is applied inappropriately.”
On 12 June, the U.S. Senate Committee on Banking, Housing, and Urban Affairs voted to approve the nominations of Richard Clarida to be Vice Chairman and a member of the Federal Reserve Board and Michelle Bowman to be a member of the Federal Reserve Board as the community bank representative.
On 18 June, President Trump announced his intent to nominate Kathleen Kraninger, who currently serves as an Associate Director of the Office of Management and Budget, to be the Director of the Bureau of Consumer Financial Protection. President Trump also announced his intent to nominate Dino Falaschetti, the current Chief Economist for the House Committee on Financial Services, to be the Director of the Office of Financial Research.
FSOC & FINANCIAL STABILITY
Financial Stability Oversight Council Held an Executive Session
On 15 June, U.S. Secretary of the Treasury Steve Mnuchin presided over an executive session of the FSOC. At the meeting, the FSOC discussed (i) potential amendments to its interpretive guidance on nonbank financial company designations, (ii) an update on the annual reevaluation of the designation of a nonbank financial company, and (iii) an application to FSOC from a bank holding company or its successor under section 117 of the Dodd-Frank Act. The FSOC also received an update regarding its cryptocurrency working group focused on assessing potential risks related to digital assets and an update on the Federal Housing Finance Agency’s proposed regulation on capital requirements for Fannie Mae and Freddie Mac. Finally, FSOC voted to approve the minutes from its meeting on 12 April.
SEC & SECURITIES
House Financial Services Committee Hearing Regarding the SEC’s Approach to Enforcing Federal Securities Laws
On 13 June, the U.S. House Committee on Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing entitled “Ensuring Effectiveness, Fairness, and Transparency in Securities Law Enforcement.” Bradley Bondi, partner at Cahill Gordon & Reindel LLP, Joseph Borg, Director of the Alabama Securities Commission, Thomas Quaadman, Vice President of the Center for Capital Markets Competitiveness, and Andrew Vollmer, Professor of Law and Director at the John W. Glynn Jr Law & Business Program at the University of Virginia School of Law provided testimony for the hearing. During the hearing, members debated whether to advance H.R. 2128, the “Due Process Restoration Act of 2017,” which would allow private parties to compel the SEC to seek legal or equitable remedies in civil actions instead of administrative proceedings. While Democratic subcommittee members criticized the bill, saying it would allow for venue shopping, Rep. Warren Davidson (R-OH), the bill’s sponsor, argued the bill is needed to create parity in venue selection rights. Several witnesses criticized the different evidentiary standards and defendant rights in SEC administrative proceedings. Subcommittee Chairman Bill Huizenga (R-MI) asked the witnesses about the Supreme Court’s recent Kokesh decision, which applied a five-year statute of limitations for SEC disgorgement actions, and whether the statute of limitations should be extended to ten years. Mr. Bondi answered that expanding the statute of limitations could create the risk of having longer SEC investigations that cost companies tens of millions of dollars. The participants also discussed H.R. 5037, the “Securities Fraud Act of 2018,” which seeks to impose exclusive federal jurisdiction over civil securities fraud actions, with opponents of the bill arguing that the bill would inhibit state securities regulators from bringing enforcement actions.
SEC Investor Advisory Committee Meeting
On 14 June, the SEC’s Investor Advisory Committee held a meeting to discuss the SEC’s proposed Regulation Best Interest and the SEC’s proposed Form CRS Relationship Summary. With regards to the proposed Regulation Best Interest, the participants discussed whether the proposal would impose a “fiduciary standard” on broker-dealers, the elements of a fiduciary standard, and what constitutes the definition of “best interest.” With regards to the proposed Form CRS Relationship Summary, the participants discussed the type of information that should be provided by Form CRS and the importance of investor education as part of the disclosure process. In his opening remarks, SEC Chairman Clayton discussed: (i) the Retail Strategy Task Force and the Division of Enforcement’s efforts to identify and deter misconduct; (ii) combating initial coin offering (“ICO”) fraud and how the SEC was able to create a fake website to promote “HoweyCoins” for “less than $20” and how fraudulent ICOs can be “cheap to engineer”; (iii) the Share Class Initiative, which was put in place to identify and punish firms who charge their clients higher fees when lower-cost share classes of the same mutual fund are available; (iv) the SEC’s formation of the Fixed Income Market Structure Advisory Committee; (v) the modernization of delivery options for fund information; (vi) the SEC’s recently proposed Regulation Best Interest and the Commission’s desire to receive comments from all market participants; (vii) the SEC’s Action Lookup for Individuals, which enables the public to find out who has been sanctioned by the SEC; and (viii) the SEC’s equity market structure initiatives, including the proposed transaction fee pilot.
Remarks of SEC Commissioner Robert Jackson Regarding Stock Buybacks and Corporate Cash Outs
On 11 June, SEC Commissioner Jackson delivered remarks before the Center for American Progress regarding stock buybacks and corporate cash outs. Commissioner Jackson noted that there has been a significant increase in the use of stock-based compensation models at U.S. public companies, but that the SEC has not reviewed its rule regarding stock buybacks and corporate cash outs since 2003. He then criticized the SEC for having failed to promulgate rules mandated by the Dodd-Frank Act regarding executive compensation and stock buybacks and called on the SEC to begin a public notice and comment period to reexamine the relevant rules. He also urged corporate boards and compensation committees to “carefully review the degree to which the buyback will be used as a chance for executives to turn long-term performance incentives into cash.”
Remarks of SEC Chairman Jay Clayton to the “Investing in America” Town Hall
On 13 June, speaking to the attendees of the “Investing in America, the SEC Comes to You” town hall in Atlanta, Chairman Clayton said the SEC’s new standard of conduct proposal raises broker-dealers’ advice obligations and changes how broker-dealers can operate today. Clayton reiterated that under the new standard of conduct “you cannot put your interests ahead of your clients’ interest” and the SEC is “going to require policies and procedures so that the exercise the broker-dealer goes through to get to that place, where they’re going to make a recommendation, also reflects a duty of care that is enhanced.” Chairman Clayton also said that the rules governing the private placement space can “use a sprucing up” and that the “private placement space can benefit from technology without adversely affecting investor protection.”
CFTC & DERIVATIVES
Remarks of CFTC Chairman J. Christopher Giancarlo Regarding Recent Findings of the Market Intelligence Branch on the Derivative Markets
On 12 June, CFTC Chairman Giancarlo delivered remarks before the Women in Derivatives Forum regarding recent findings of the Market Intelligence Branch (“MIB”), a specialized unit within the CFTC’s Division of Market Oversight created “to understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends.” Among other things, the MIB found that: (i) there is no clear indication of a wide-spread increase in the frequency or intensity of sharp price movements in recent years; (ii) sharp price movements occur more often during periods of elevated volatility; (iii) news and recurring market data releases are a factor in many contracts MIB studied; so much so that news events are a topic worthy of further study as well as something to be filtered out of future analyses; and (iv) some contracts see large movements in overnight trading but not a disproportionate amount when compared to volume traded during day/night. Commissioner Giancarlo concluded that these findings do not support one “contemporary narrative” that “recent changes in market structure, particularly the growing presence of principal trading firms and high frequency trading, has in some way made markets less stable” and that such findings show that “today’s US commodity futures markets continue generally to function well, are able to digest information quickly and readily accommodate heightened volatility.”
o 19 June: CFPB request for information comments are due regarding the Bureau’s adopted regulations and new rulemaking authority.
o 20 June: The House Financial Services Committee will hold a hearing entitled “Empowering a Pro-Growth Economy by Cutting Taxes and Regulatory Red Tape.”
o 20 June: The House Financial Services Terrorism and Illicit Finance Subcommittee will hold a hearing entitled “Illicit Use of Virtual Currency and the Law Enforcement Response.”
o 20 June: The Senate Banking National Security and International Trade and Finance Subcommittee will hold a hearing entitled “Combating Money Laundering and Other Forms of Illicit Finance: How Criminal Organizations Launder Money and Innovative Techniques for Fighting Them.”
o 21 June: The House Financial Services Committee will hold a hearing entitled “Oversight of the U.S. Securities and Exchange Commission.”