US Regulatory Update
Federal Reserve Open Meeting Regarding Its Proposed Changes to the Volcker Rule
On 30 May, the Federal Reserve Board of Governors (“Federal Reserve Board”) voted to propose amendments aimed at simplifying and tailoring the Volcker Rule. The proposed amendments would, among other things: (i) “tailor the rule's compliance requirements based on the size of a firm's trading assets and liabilities, with the most stringent requirements applied to firms with the most trading activity”; (ii) “provide more clarity by revising the definition of ‘trading account’ in the rule, in part by relying on commonly used accounting definitions”; (iii) “clarify that firms that trade within appropriately developed internal risk limits are engaged in permissible market making or underwriting activity”; and (iv) “simplify the trading activity information that banking entities are required to provide to the agencies.” Federal Reserve Board Chairman Jerome Powell stated that “the proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance.” Comments on the proposed rule are due 60 days after its publication in the Federal Register. The proposal is a joint proposal to be promulgated by the Federal Reserve Board, Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency, the Securities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission (“CFTC”). The FDIC approved the proposed amendments on 31 May, and the SEC and CFTC are having open meetings to consider the proposal on 5 June and 4 June, respectively.
Economic Growth, Regulatory Relief, and Consumer Protection Act
On 24 May, President Trump signed into law S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act. The Act, among other things: (i) raises the threshold for labeling a bank as a “systemically important financial institution” from $50 billion in assets to $250 billion; (ii) exempts banks with less than $10 billion in assets from the Volker Rule (which places limits on banks’ conducting certain trading activities); (iii) requires banking regulators to classify certain municipal securities as level 2B high quality liquid assets under the Liquidity Coverage Ratio Rule; (iv) allows SEC reporting companies to use Regulation A+ to raise capital; and (v) increases transparency and consensus with respect to state insurance regulators’ regarding the development of certain international insurance-related standards.
House Committee on Appropriations Releases Fiscal Year 2019 Financial Services Bill
On 23 May, the House Committee on Appropriations released its fiscal year (“FY”) 2019 Financial Services and General Government Appropriations bill. The bill would, among other things: (i) provide the 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; and (v) establish criteria for Congressional review of CFPB rulemakings.
House Committee on Financial Services Hearing on Capital Formation Proposals
On 23 May, the House Subcommittee on Capital Markets, Securities, and Investment held a hearing entitled “Legislative Proposals to Help Fuel Capital and Growth on Main Street.” The hearing focused on a number of bills designed to “eliminate regulatory hurdles that harm the ability of ‘Main Street’ businesses, early-stage companies, smaller companies, and emerging growth companies to access capital, innovate, grow and create jobs.” The bills discussed included: (i) H.R. 5054, the “Small Company Disclosure Act of 2018,” which would provide emerging growth companies and other small companies an exemption from the requirements to use eXtensible Business Reporting Language for financial statements and other periodic reporting; (ii) H.R. 5756, which would require the SEC to adjust certain resubmission thresholds for shareholder proposals; (iii) H.R. 5877, the “Main Street Growth Act,” which would amend the Securities Exchange Act of 1934 to allow for the registration of venture exchanges; (iv) a bill directing the SEC to revise section 230.163 of title 17, United States Code, to extend the exemption offered in such section to communications made by underwriters and dealers acting by or on behalf of a well-known seasoned issuer”; (v) a bill directing the SEC to increase and align the smaller reporting company and non-accelerated filer financial thresholds; (vi) a bill directing the SEC to conduct a study with respect to research coverage of small issuers before their initial public offerings; (vii) a bill removing the limitation on large accelerated filers qualifying as an emerging growth company; (viii) a bill providing a 5 year extension of certain exemptions and reduced disclosure requirements for companies that were emerging growth companies and would continue to be emerging growth companies but for the 5-year restriction on emerging growth companies; (ix) a bill requiring the SEC to implement rules simplifying the quarterly financial reporting regime; (x) a bill requiring the SEC to revise the definition of a qualifying portfolio company to include an emerging growth company, for purposes of the exemption from registration for venture capital fund advisers under the investment Advisers Act of 1940; and (xi) a bill amending the Investment Company Act of 1940 to increase the percentage of voting shares a diversified company may hold in a single issuer.
House Committee on Financial Services Hearing Regarding Insurance for Autonomous Vehicles
On 23 May, the House Committee on Financial Services held a hearing entitled “The Impact of Autonomous Vehicles on the Future of Insurance,” i.e., the development of the driverless car and its effect on insurance. Chairman Sean Duffy (R-WI) expressed interest in what role Congress should play so that innovation is not “crimped” and to ensure laws keep pace with innovation. Several Members and State Farm Counsel Ryan Gammelgard raised concerns over insurance companies’ having sufficient access to data possessed by auto manufacturers and technology companies. Marsh & McLennan U.S. Manufacturing & Automotive Practice Leader David Carlson expressed his belief that a regulatory “sandbox” needs to be created to discuss these issues. American Family Mutual Insurance Company Vice President Sam Geraci suggested the states should retain their traditional role of regulating insurance.
House Committee on Financial Services Markup of the Foreign Investment Risk Review Modernization Act of 2018
On 22 May, the House Committee on Financial Services unanimously approved H.R. 5841, the Foreign Investment Risk Review Modernization Act of 2018. As discussed during the committee markup of the bill, the bill would: (i) “not expand [the Committee on Foreign Investment in the United States’ (“CFIUS”)] jurisdiction to outbound technology transfer through joint ventures or other arrangements” but rather leave those transactions under the jurisdiction of the existing export control review process; (ii) impose a filing fee on proposed transactions submitted to CFIUS to help fund its operations; (iii) require CFIUS to issue a report to Congress on investments by foreign persons into U.S. entertainment and information sectors; (iv) allow CFIUS to “suspend a proposed or pending transaction that may pose a risk . . . for such time as the covered transaction is under review or investigation”; and (v) expand the CFIUS review process to include national security risks resulting from reductions in the employment of U.S. persons whose knowledge or skills are critical to national security.
Senate Appropriations Committee Hearing on Review of the FY2019 Budget Request for the U.S. Department of the Treasury
On 22 May, the Senate Subcommittee on Financial Services and General Government held a hearing entitled “Review of the FY2019 Budget Request for the U.S. Department of the Treasury.” Secretary of the Treasury Steven Mnuchin testified before the subcommittee on matters regarding, among other things: (i) CFIUS; (ii) the Financial Crimes Enforcement Network (“FinCEN”), and (iii) funding for the Treasury’s Office of Terrorism and Financial Intelligence. When questioned about FinCEN’s customer due-diligence rule requiring financial institutions to verify customer identities, Secretary Mnuchin stated that the Department of Treasury is concerned about the ability of community banks to satisfy the rule without being burdened by undue amount of costs and that the Department of Treasury has engaged with community banks on the issue. Secretary Mnuchin also reiterated his support for the Senate Banking Committee’s CFIUS reform bill, S. 2098.
President Trump Announces Intent to Nominate Elad Roisman to be SEC Commissioner
On 1 June, President Trump announced his intent to nominate Elad Roisman to be Commissioner of the Securities and Exchange Commission for a five year term expiring June 5, 2023. Mr. Roisman currently serves as Chief Counsel for the Senate Committee on Banking, Housing and Urban Affairs.
Senate Confirms FDIC Nominee Jelena McWilliams as Chair
On 24 May, the full U.S. Senate voted 69-24 to confirm Jelena McWilliams as the new Federal Deposit Insurance Corporation (“FDIC”) Chair. Ms. McWilliams is the former chief legal officer of Fifth Third Bancorp.
DOL FIDUCIARY DUTY RULE
U.S. Fifth Circuit Court of Appeals Denies Three States’ Motion to Intervene in Appeal of DOL’s Fiduciary Duty Rule
On 22 May, the U.S. Fifth Circuit Court of Appeals denied the 16 May 2018 request from the Attorneys General of New York, California, and Oregon that the court reconsider its 2 May 2018 refusal to allow them to intervene in a lawsuit brought by nine financial industry trade groups, including the U.S. Chamber of Commerce and SIFMA, that resulted in the DOL’s Fiduciary Duty Rule’s being repealed on 15 March 2018. The DOL’s rule is still in effect until the U.S. Fifth Circuit Court of Appeals issues its mandate to vacate the rule.
SEC & SECURITIES
SEC Proposes FAIR Act Rules to Promote Research Reports on Investment Funds
On 23 May, the SEC voted unanimously to propose rules and amendments that would “promote research on mutual funds, exchange‑traded funds, registered closed-end funds, business development companies, and similar covered investment funds.“ Among other things, the proposal would establish a “safe harbor for an unaffiliated broker or dealer participating in a securities offering of a ‘covered investment fund’ to publish or distribute a ‘covered investment fund research report.’” The safe harbor would apply where the publication or distribution of such research would not constitute an “offer for sale or offer to sell a security that is the subject of an offering of the covered investment fund, even if the broker-dealer is participating or may participate in a registered offering of the covered investment fund’s securities.” Comments on the proposed rule are due 30 days after its publication in the Federal Register.
Remarks of Brett Redfearn, Director, Division of Trading and Markets on Proposed Regulation Best Interest
On 22 May, Brett Redfearn, Director of the SEC’s Division of Trading and Markets, delivered remarks before the 2018 FINRA Annual Conference regarding the proposed Regulation Best Interest. Mr. Redfearn stated that the proposed rule seeks to “enhance the quality of broker-dealer recommendations to retail customers” and “preserve the ‘pay as you go’ model as a viable choice for investors” seeking recommendations about securities. He expressed his view that Regulation Best Interest significantly changes the status quo for broker-dealers that provide advice and that the rule builds upon existing regulations and reflects vast experience and expertise at the SEC. In addition to outlining the goals of Regulation Best Interest, Mr. Redfearn outlined some of the key aspects of the proposal, including the contours of the “best interest” standard, and encouraged market participants to provide comments and data on how the proposed regulation might impact industry practices regarding investment advice from broker-dealers.
CFTC & DERIVATIVES
CFTC’s Staff Issues Virtual Currency Advisory for Registered Exchanges and Clearinghouses
On 21 May, the CFTC’s Division of Market Oversight and Division of Clearing and Risk issued a joint staff advisory guiding exchanges and clearinghouses registered with the CFTC for listing virtual currency derivative products. According to staff advisory, the “advisory is a not a compliance checklist; rather, it clarifies the Commission staff’s priorities and expectations in its review of new virtual currency derivatives.” The advisory highlights certain areas that require particular attention when listing a new virtual currency derivatives contract, including: (i) “enhanced market surveillance”; (ii) close coordination with CFTC staff regarding monitoring for potential manipulation or fraud; (iii) “large trader reporting”; (iv) “outreach to member and market participants”; and (v) clearinghouse risk management and governance.
CFTC, NASAA Sign Agreement for Greater Information Sharing
On 21 May, the CFTC and the North American Securities Administrators Association announced they had signed a mutual cooperation agreement to establish a closer working relationship between the CFTC and the individual state securities agencies. CFTC Chairman J. Christopher Giancarlo stated that “Information-sharing is key to cooperative enforcement operations, and by working together, we can ensure that the rapidly evolving financial technology space has the appropriate oversight to pursue bad actors, protect market participants, and allow for market-enhancing innovation.” According to the announcement, the “purpose of the . . . agreement is to assist participants in enforcing the Commodity Exchange Act . . . [b]ut information shared under the [agreement] also could generate enforcement actions under state securities laws, commodity codes, or other areas of law.”
Senate Committee on Banking Hearing Regarding Cybersecurity Risks to Financial Services
On 24 May, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Cybersecurity: Risks to the Financial Services Industry and Its Preparedness.” The hearing sought to assess cybersecurity risks in the industry and examine what steps industry participants have taken to increase cyber readiness, combat cyberattacks, and increase resiliency. Committee Chairman Mike Crapo (R-ID) stated it is “critical that personal data is protected, consumer impact in the event of a data breach is minimized, customers’ ability and access to credit and their assets is not harmed, and the financial sector is resilient enough to continue to function [despite] a cyber-breach at a financial-sector company.” Ranking Member Sherrod Brown (D-OH) stressed the need for financial institutions and law enforcement to “share sensitive cyber threat information more quickly [to] help combat [cybersecurity] threats.”
o 4 June: the CFTC will hold an open meeting to discuss, among other things: (i) a proposed Volcker Rule; (ii) a proposed De Minimis Exception Rule; and (iii) the establishment of subcommittees for the CFTC Technology Advisory Committee.
o 5 June: the SEC will hold an open meeting to discuss: (i) whether to adopt new rules and amendments to provide certain registered investment companies (“funds”) with an optional method to transmit shareholder reports; (ii) whether to issue a release requesting comment about processing fees for delivering shareholder reports and other materials to fund investors; (iii) whether to issue a release requesting comment from individual investors and other interested parties on how to enhance the delivery, design, and content of fund disclosures, including shareholder reports and prospectuses; and (iv) whether to propose amendments to the Volcker Rule.
o 13 June: the SEC will hold an interactive event with investors at Georgia State University College of Law titled “Investing in America.”