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US Regulatory Research

US Regulatory Updates

US Regulatory Update

GENERAL

Economic Growth, Regulatory Relief, and Consumer Protection Act

On 17 May, the U.S. House Committee on Rules announced that it would be meet on 21 May 2018 to consider S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.  The full House of Representatives will then likely vote on S. 2155 on 22 May 2018.  The bill, which passed the Senate by a vote of 67-31 and is not expected to be amended, includes provisions, among others, to: (i) increase from $50 billion to $250 billion in consolidated assets the threshold for subjecting bank holding companies to SIFI regulation and enhanced prudential standards; (ii) exempt banks with less than $10 billion in consolidated assets from compliance with the Volcker Rule; and (iii) increase “transparency” and consensus with state insurance regulators with respect to the development of certain international insurance-related standards. The bill also affirms the authority of the Federal Reserve Board to require the establishment of intermediate holding company structures over the U.S. subsidiaries of foreign banking organizations with total global assets equal to or greater than $100 billion.

Nominations Hearings

On 15 May, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the nominations of Richard Clarida to be Vice Chairman and a member of the Board of Governors of the Federal Reserve (“Federal Reserve Board”) and Michelle Bowman to be a member of the Federal Reserve Board as the community bank representative. Mr. Clarida stated that his priority “will be to support policies that are effective, efficient, and appropriately tailored and that preserve the far greater resiliency and stability of the financial system that has been achieved as a result of the significant reforms that have been put in place since the financial crisis.”  Ms. Bowman stated that she has “witnessed firsthand how the regulatory environment created in the aftermath of the crisis has disadvantaged community banks” and that she would work “to ensure that rules preserve the resiliency of the financial system, but are appropriately tailored to the size, complexity, and risk of an institution.”   

DOL FIDUCIARY DUTY RULE

DOL Issues Field Assistance Bulletin Regarding Its Temporary Enforcement Policy of Fiduciary Duty Rule

On 7 May, the Department of Labor’s (“DOL”) issued a Field Assistance Bulletin (2018-02) regarding the applicability of the Fiduciary Duty Rule in light of the U.S. Fifth Circuit Court of Appeals’ decision to vacate the Rule on 15 March 2018. The bulletin states that the DOL (i) “has concluded that financial institutions should be permitted to continue to rely upon the temporary enforcement policy [adopted on 22 May 2017] pending the Department’s issuance of additional guidance,” and (ii) “will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the [Best Interest Contract] Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules.” The bulletin also states that the DOL “is evaluating the need for other temporary or permanent prohibited transaction relief for investment advice fiduciaries, including possible prospective and retroactive prohibited transaction relief” and will “consider any applications for additional relief.”

U.S. Fifth Circuit Court of Appeals Denies AARP and State Attorney Generals’ Motion to Intervene in Appeal of DOL’s Fiduciary Duty Rule

On 2 May, the U.S. Fifth Circuit Court of Appeals denied the motions of AARP, Inc., and Attorneys General of New York, California, and Oregon, 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 being vacated on 15 March 2018. The Court of Appeals did not provide any reasoning for its denial.

o   On 16 May, Attorneys General of New York, California, and Oregon filed a motion requesting that the U.S. Fifth Circuit Court of Appeals reconsider its 2 May 2018 denial of the Attorney General’s motion to intervene.

STANDARD OF CONDUCT FOR BROKER-DEALERS AND INVESTMENT ADVISERS

Remarks of SEC Chairman Jay Clayton Regarding the SEC’s Recently Proposed Rules and Interpretations regarding Standards of Conduct for Broker-Dealers and Investment Advisers.

On 2 May, SEC Chairman Jay Clayton delivered remarks at Temple University regarding the SEC’s recently proposed rules and interpretations regarding the regulation of the relationship between investment professionals and their retail customers and clients. Chairman Clayton identified “three key issues with respect to the provision of investment advice to retail investors”: (i) “confusion and lack of clarity” as to the difference between broker-dealers and investment advisers and the services they offer and fees they charge; (ii) the different professional and legal obligations that broker-dealers and investment advisers must follow, as well as the disclosure and mitigation of conflicts; and (iii) the “lack of regulatory consistency and coordination.” Chairman Clayton stated that the SEC’s recently proposed rules and interpretations aim to address these issues by: (i) requiring broker-dealers and investment advisers to “disclose to investors the key aspects of their relationship in a form that is clear, short, and complete”; (ii) requiring broker dealers to provide “recommendations to retail investors . . . in the best interest of . . . retail investors, without putting the financial interest of the broker-dealer ahead of the retail customer”; and (iii) promoting regulatory harmonization by putting the SEC in “a good position to work with [its] fellow federal and state regulators to seek consistency and cohesion across the entire spectrum of investment professionals and products.”

Federal Register Publishes SEC’s Recently Proposed Rules and Interpretation on the Standard of Conduct for Broker-Dealers and Investment Advisers.

On 9 May, the Federal Register published the SEC’s recently proposed rules and interpretations regarding standards of conduct for broker-dealers and investment advisers, available here, here, and here. The public notice and comment period began upon publication and closes on 7 August 2018.

SEC & SECURITIES

House Committee on Financial Services Hearing Regarding the Oversight of the SEC’s Division of Enforcement

On 16 May, the House Committee on Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing entitled “Oversight of the SEC’s Division of Enforcement” (the “Division”).

Co-Directors of the Division Stephanie Avakian and Steven Peikin testified before the subcommittee regarding, among other things: (i) the Division’s activities and effectiveness of the enforcement program; (ii) “initial coin offerings” (“ICOs”) and cryptocurrencies; and (iii) the recent Supreme Court decision in Kokesh v. SEC regarding the statute of limitations of SEC disgorgement actions. In his opening remarks, Subcommittee Chair Bill Huizenga (R-MI) stated that he supported recent efforts by SEC Chairman Jay Clayton to redirect the Division’s “focus away from the ‘broken windows’ philosophy” adopted by the previous SEC Chair, echoing SEC Commissioner Hester Peirce’s remarks on 11 May 2018 (further discussed below). 

o   Corporate Penalties: When questioned by Subcommittee Chair Huizenga regarding the Co-Director’s views regarding the differences between corporate and individual penalties, Mr. Peikin stated that he agreed with SEC Chairman Clayton’s view that “individual liability . . . drives behavior more even-so than organizational liability” and that the Division has begun focusing more on targeting individuals in cases.

o   ICOs and Cryptocurrency: When asked by Subcommittee Ranking Member Carolyn Maloney (D-NY) whether a digital token determined to be a security when it is first offered to investors can later “evolve into something that is not a security,” Ms. Avakian stated that the SEC would examine the “facts and circumstances” of the token to determine whether it is a security, and that if the “substance of something changes over time,” the SEC would reanalyze the determination. Ms. Avakian emphasized that generally, the SEC would examine the “substance” rather than the form of the transaction to determine if it would be considered a security.

o   Kokesh Decision: When questioned by Subcommittee Chair Huizenga about the impact of the Kokesh v. SEC decision, which held that “any claims for disgorgement in an SEC enforcement action must be commended within five years of the date the claim accrued,” Mr. Peikin stated that it is “a very significant decision that’s having meaningful impact on [the SEC’s] ability to recover funds and return them to investors, particularly [for] cases of long-running fraud.” Mr. Peikin also stated that the SEC has had to forgo the recovery of over $800 million in its litigation and settlements in the past year due to the decision. When questioned by Rep. Randy Hultgren (R-IL) what steps Congress can take in light of the Kokesh decision, Mr. Peikin stated that they did not have any specific proposed “legislative fix” to present but is willing to work with the Subcommittee to address the issue.

Remarks of SEC Commissioner Hester Peirce Regarding the SEC’s Enforcement Program

On 11 May, SEC Commissioner Hester Peirce delivered remarks before the 50th Annual Rocky Mountain Securities Conference regarding her “overarching philosophy” of the SEC’s enforcement program. During her remarks, Commissioner Peirce criticized certain aspects of the SEC’s enforcement program, including: (i) the fact that the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) is more closely aligned with the SEC’s Enforcement Division than the SEC’s policy divisions, stating that “OCIE is not an investigative arm of the Enforcement Division” and that it has historically been “part of the rulemaking divisions”; and (ii) the previous SEC Chair’s “broken windows” approach to enforcement, noting that it “diverts resources from high priority issues,” dissuades regulated entities from reporting misconduct, and “provides bad incentives for Commission staff” to focus on the “number, rather than the quality of the cases.” In addition, she emphasized the need for the SEC to follow due process principles when undertaking regulatory actions, including ensuring that: (i) the SEC does not use enforcement actions as an alternative to rulemaking; (ii) the Enforcement Division only brings actions “based on established legal obligations”; (iii) a “settlement negotiated by someone desperate to end an investigation that is disrupting or destroying her life [does] not form the basis on which the law applicable to others is based”; (iv) the SEC does not unnecessarily prolong its investigation only in “fear of missing something or appearing to have too light of an enforcement touch”; and (v) “the SEC [does] not request, encourage, or incentivize people to waive [attorney-client] privilege[s].” Commissioner Peirce also highlighted the need to ensure that the SEC’s enforcement program “does not cause harm,” noting that the SEC should: (i) “take great care in imposing liability on chief compliance officers [(“CCOs”)], as “it is not the job of the SEC to second-guess the good faith decisions of CCOs”; and (ii) “be extremely careful in how and when it imposes corporate penalties to avoid making an already bad situation worse for shareholder.”

SEC Commissioner Michael Piwowar to Depart SEC

On 7 May, SEC Commissioner Michael Piwowar published a letter sent to President Donald Trump announcing his intention to depart the SEC on “the earlier of [7 July 2018] or the swearing in of [his] successor.” Commissioner Piwowar’s term as a Commissioner officially ends on 5 June 2018, although he can stay at the SEC past that date until his replacement is confirmed.

SEC Launches Searchable Database for Individuals with Court or Commission Orders Entered Against Them

On 2 May, the SEC launched its SEC Action Lookup for Individuals (“SALI”), a searchable database for “individuals with court or commission orders entered against them.” According to the press release, the database “will help identify registered and unregistered individuals who have been parties to past SEC enforcement actions and against whom federal courts have entered judgments or the SEC has issued orders.”  

SEC Denies Request from Exchanges to Increase Fees

On 1 May, the SEC published an order denying a request by national securities exchanges (“Exchanges”) to increase certain fees charged by the exchanges for market data. According to the order, the SEC stated that it “does not believe that the [Exchanges] have provided sufficient information regarding, or adequate justification for, the changes described in the [request]” and that such request “raises questions as to whether the changes will result in fees that are fair and reasonable [and] not unreasonably discriminatory.”

CFTC & DERIVATIVES

Remarks of CFTC Chairman J. Christopher Giancarlo Regarding Cross Border Regulatory Cooperation and Swaps Market Reforms

On 7 May, CFTC Chairman J. Christopher Giancarlo delivered remarks before the Association of German Banks regarding cross border regulatory cooperation and swaps market reforms.

o   Cross Border Regulatory Cooperation: Chairman Giancarlo highlighted the importance of cross border regulatory harmonization and reaffirmed his commitment to “outcomes-based deference decisions that acknowledge that different regulators can get to the same result in different ways.” He also reiterated his concerns over the EU’s “legislative proposal for a new framework for the regulation and supervision of central clearing counterparties [(“CCPs”)] . . . would subject U.S. CCPs to overlapping EU regulation and supervision without due deference to CFTC regulation and supervision.”

o   Swaps Market Reform: Noting that the CFTC “now ha[s] more than four years of U.S. experience with the current CFTC regulatory framework for swaps,” Chairman Giancarlo stated that the CFTC is in “position to address flaws, recalibrate imprecision and optimize measures in the CFTC’s initial implementation of swaps market reform.” He referenced the white paper on “Swaps Regulation Version 2.0” that he recently co-published with Bruce Tuckman, the CFTC’s Chief Economist, as part of this initiative, and discussed recommendations made by the white paper regarding: (i) swaps central counterparties; (ii) swaps reporting; (iii) swaps execution; (iv) swap dealer capital; and (v) the end user exceptions.

Remarks of CFTC Commissioner Brian Quintenz Regarding Regulatory Harmonization Between the CFTC and SEC

On 2 May, CFTC Commissioner Brian Quintenz delivered remarks before the FIA 40th Annual Law & Compliance Division Conference regarding regulatory harmonization between the CFTC and SEC. In his remarks, Commissioner Quintenz supported: (i) having “identical or substitutable” regulatory requirements for market participants dually registered with the CFTC and SEC except “to the extent they reflect a concrete and irreconcilable difference between the securities and derivatives markets”; and (ii) further coordination of “investigative and prosecutorial actions” between the two agencies, particularly with regards to cryptocurrency-related matters. Commissioner Quintenz noted that with these goals in mind, the CFTC and SEC are working to update the existing memorandum of understanding signed by the two agencies. Commissioner Quintenz also commented on the CFTC’s audit trail requirements, stating that such requirements can also benefit from “harmonization and simplification.”

UPCOMING DEADLINE

o   25 May: comments are due on the SEC’s proposal for a transaction fee pilot for NMS stocks.

Ianthe Zabel
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