US Regulatory Update
President Trump Signs Executive Order Establishing the Task Force on Market Integrity and Consumer Fraud
On 11 July, President Trump issued an Executive Order establishing a new “Task Force on Market Integrity and Consumer Fraud” (“Task Force”). The goal of the Task Force is to combat (i) fraud against consumers, especially fraud against the elderly, military service members, and veterans, and (ii) corporate fraud that victimizes the general public and the government. The Task Force is comprised of a number of divisions of the Department of Justice (“DOJ”), including the Federal Bureau of Investigation and various United States Attorney’s Office. The executive order also directs the DOJ to invite participation from multiple executive agencies, including the SEC, CFPB, and the Commodity Futures Trading Commission (“CFTC”). SEC Chairman Jay Clayton, speaking at the announcement of the Task Force, highlighted the SEC’s actions involving fraudulent initial coin offerings (“ICOs”), pointing out that the SEC has frozen tens of millions of dollars in assets raised by the suspicious ICOs while working with federal criminal authorities. Chairman Clayton also said the SEC is working with other regulators to “provide clarity on the application of our laws and regulations to new and emerging products” such as digital assets.
President Trump Signs Executive Order Regarding Agency In-House Judges
On 10 July, President Trump issued an Executive Order empowering the heads of federal agencies to directly appoint in-house judges. This order is in response to the recent Supreme Court decision in Lucia v. Securities and Exchange Commission, which concluded that the Securities and Exchange Commission’s (“SEC”) administrative law judges are considered “inferior officers” under the Constitution and thus are subject to the Appointments Clause. Under the order, the heads of federal agencies may directly appoint in-house judges, and agency heads also are allowed to ratify currently sitting judges at the Social Security Administration, the Department of Health and Human Services, the Department of Labor, and other federal agencies that use in-house judges. However, the Supreme Court’s decision leaves in question the validity of many past administrative law decisions made by in-house judges who were not properly appointed by the President or the agency heads.
President Trump Nominates Brett Kavanaugh to the Supreme Court
On 9 July, President Trump nominated Brett Kavanaugh to fill the seat Justice Anthony Kennedy vacated last month. Mr. Kavanaugh has served on the US. Court of Appeals for the District of Columbia for the past twelve years.
U.S. House Passes Eight Financial Services Bills
On 10 July, the U.S. House of Representative passed eight financial services bills, including:
· H.R. 4537, the International Insurance Standards Act of 2017, which would preserve the state-based system of insurance regulation and provide greater Congressional oversight and transparency with respect to international insurance standards negotiations.
· H.R. 5749, the Options Markets Stability Act, which would require bank regulators to implement a risk-adjusted approach to value centrally-cleared exchange-listed derivatives to better and more accurately reflect exposure and promote market-making activity.
· 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 with the SEC to provide a venue tailored to the needs of small and emerging growth companies and allow qualifying companies one venue in which their securities can trade.
· H.R. 5970, the Modernizing Disclosures for Investors Act, which would require the SEC to provide a report to Congress with a cost-benefit analysis of emerging growth companies’ use of SEC Form 10-Q and recommendations for decreasing costs, increasing transparency, and increasing efficiency of quarterly financial reporting by emerging growth companies.
· H.R. 6139, the Improving Investment Research for Small and Emerging Issuers Act, which would require the SEC to carry out a study to evaluate the issues affecting the provision of and reliance upon investment research into small issuers, including emerging growth companies and pre-IPO companies.
U.S. House Committee on Financial Services Advances Eight Bills
On 11 July, the following eight bills, were approved by voice vote by the U.S. House Committee on Financial Services:
· H.R. 3555, the Exchange Regulatory Improvement Act, which would require the SEC to set forth the facts and circumstances it considers in determining what is a “facility” of an exchange.
· H.R. 6177, the Developing and Empowering our Aspiring Leaders Act, which would require the SEC to revise the definition of a “qualifying investment” to include equity securities acquired in a secondary transaction.
· H.R. 6319, the Expanding Investment in Small Businesses Act, which would require the SEC to study whether the current diversified fund limit threshold for mutual funds of 10% constrains their ability to take meaningful positions in small-cap companies.
· H.R. 6322, the Enhancing Multi-Class Share Disclosure Act, which would require issuers with a multi-class stock structure to make certain disclosures in any proxy or consent solicitation material.
· H.R. 6324, the Middle Market IPO Underwriting Cost Act, which would require the SEC, in consultation with the Financial Industry Regulatory Authority, to study the direct and indirect costs associated with small and medium-sized companies to undertake initial public offerings.
· H.R. 6320, the Promoting Transparent Standards for Corporate Insiders Act, which would require the SEC to consider certain types of amendments to Rule 10b5-1. The bill also would direct the SEC to consider how any amendments to Rule 10b5-1 would clarify and enhance existing prohibitions against insider trading, while also considering the impact of any such amendments on attracting candidates for insider positions, capital formation, and a company’s willingness to operate as a public company.
· H.R. 6321, the Investment Adviser Regulatory Flexibility Improvement Act, which would direct the SEC to consider whether alternative methods for businesses or organizations to qualify as a “small business” or “small organization” should include a threshold based on the number of non-clerical employees of the business or organization.
· H.R. 6323, the National Senior Investor Initiative Act of 2018, which would (i) create an interdivisional task force at the SEC to examine and identify challenges facing senior investors and (ii) require the Government Accountability Office to study the economic costs of the exploitation of senior citizens.
Treasury Secretary Steve Mnuchin Testifies Before the House Financial Services Committee
On 12 July, the U.S. House Committee on Financial Services held a hearing entitled “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.” Secretary of the Treasury Steve Mnuchin was the sole witness. Members from both sides expressed concern over the tariffs placed on China and whether those tariffs might lead to a global recession. Secretary Mnuchin said the Treasury will continue to monitor the situation, but as of now he does not see any indicators that the tariffs are impacting the global economy. Responding to several members’ questions regarding capital rules and the supplemental leverage ratio, Mnuchin said he believes the supplemental leverage ratio should be updated to offset client margin and that he is discussing these matters with other regulators. Regarding financial technology (“FinTech”), Mnuchin said the Treasury is working on a FinTech report that should be released within the next thirty days.
U.S. House Financial Services Committee Hearing on Illicit Finance and Weapons Proliferation
On 12 July, the U.S. House Committee on Financial Services Subcommittee on Terrorism and Illicit Finance held a hearing entitled “Countering the Financial Networks of Weapons Proliferation.” David Albright, Founder and President of the Institute for Science and International Security, Tom Keatinge, Director of the Centre for Financial Crime and securities Studies at the Royal United Services Institute, Emanuele Ottolenghi, Senior fellow at the Foundation for Defense of Democracies, and Elizabeth Rosenberg, Senior Fellow at the Center for a New American Security, provided testimony for the hearing. Several members expressed concern over the proliferation of shell corporations and their ability to hide illicit financial transactions. In response, Ms. Rosenberg said that the Financial Crimes Enforcement Network (“FinCEN”) is vital in the effort to stop these transactions, and she suggested that legislation regarding the beneficial ownership of corporations would help identify bad actors. Regarding the regulatory burden banks face, Mr. Albright called for a system that properly addresses the delicate balance between privacy and security and said that more data is not necessarily the key to combating these illicit networks because governments cannot process such a large amount of data. Rather, Mr. Albright said cooperation from banks is the key.
SEC & Securities
SEC Office of Compliance Inspections and Examinations Identifies Common Deficiencies Regarding “Best Execution” Obligations
On 11 July, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert regarding the most common deficiencies that the staff has cited in recent examinations of advisers’ compliance with their best execution obligations. When an adviser has the responsibility to select broker-dealers and execute client trades, they have a fiduciary obligation to obtain the “best execution” of client transactions. The common deficiencies include: (i) “[n]ot performing best execution reviews”; (ii) “[n]ot considering materially relevant factors during best execution reviews”; (iii) “[n]ot seeking comparisons from other broker-dealers”; (iv) “[n]ot fully disclosing best execution practices”; (v) “[n]ot disclosing soft dollar arrangements”; (vi) “[n]ot properly administering mixed use allocations”; (vii) “[i]nadequate policies and procedures relating to best execution”; and (viii) “[n]ot following best execution policies and procedures.”
CFTC & Derivatives
CFTC Market Risk Advisory Committee Meeting
On 12 July, the CFTC’s Market Risk Advisory Committee (“MRAC”) held a meeting to discuss the MRAC’s upcoming priorities and agenda, the discontinuation of the London Interbank Offered Rates (“LIBOR”), and the transition from the use of LIBOR to other alternative risk-free rates, in particular the Secured Overnight Financing Rate (“SOFR”). Specifically, the participants discussed: (i) the role of interest rate benchmarks in the economy, LIBOR Reform, and the current status of global reform initiatives, such as the efforts of the Financial Stability Board and the Alternative Reference Rates Committee; (ii) efforts to improve LIBOR and the development of SOFR and SOFR derivatives; and (iii) the impact of LIBOR reform on the derivatives markets, including the effect on legacy swap contracts, the development of fallback language, and key risk management and governance considerations for market participants. In addition, the MRAC voted to establish the LIBOR Reform Subcommittee to further analyze and examine LIBOR-related matters.
· In his opening remarks, Commissioner Brian Quintenz noted that the EU has proposed amendments to the EU Benchmarks Regulation, which became effective in January 2018, that could affect U.S. firms and that the U.S. does not have a comparable regulation. Instead, U.S. regulators have encouraged U.S. benchmark administrators to abide by the Principles for Financial Benchmarks published by the International Organization of Securities Commissions (“IOSCO”) in 2013. Commissioner Quintenz warned that “these amendments could result in yet another example of extraterritorial overreach by E.U. authorities, analogous to the proposed amendments to the European Markets Infrastructure Regulation (“EMIR”) regarding the regulation of third-country CCPs.”
CFTC Announces Largest Ever Whistleblower Award
On 12 July, the CFTC announced its largest ever whistleblower award of approximately $30 million. In 2011, the whistleblower alerted the SEC and CFTC that JPMorgan Chase’s private bank and wealth management businesses failed to disclose conflicts of interests to customers. Previously the highest CFTC award amount was in March 2016 for more than $10 million.
o 16 July: SEC Fixed Income Market Structure Advisory Committee meeting.
o 17 July: Senate Banking Committee hearing on “The Semiannual Monetary Policy Report to the Congress.”
o 17 July: House Financial Services hearing on “Examining Capital Regimes for Financial Institutions.”
o 17 July: Financial Stability Oversight Council executive session on (i) the application to the Council from a bank holding company or its successor under Section 117 of Dodd-Frank; (ii) an update on the annual reevaluation of the designation of a nonbank financial company; and (iii) an update on the Fed’s stress tests.
o 18 July: House Financial Services Subcommittee on Monetary Policy and Trade hearing on “The Future of Money: Digital Currency.”
o 18 July: House Financial Services hearing on “Monetary Policy and the State of the Economy.”
o 18 July: SEC will hold an open meeting to discuss: (i) whether to adopt an amendment to Rule 701(e); (ii) whether to issue a concept release requesting comment on potential revisions to rule 701 and Form S-8; (iii) whether to propose amendments to the disclosure requirements in Rule 3-10 and Rule 3-16 of Regulation S-X; and (iv) whether to adopt amendments to Rule 3a1-1, Regulation ATS and new form ATS-N related to certain alternative trading systems.
o 18-19 July: LabCFTC will hold office hours at their NYC office to engage with innovators and facilitate market enhancing FinTech innovation,
o 19 July: Comments due to CFTC regarding its MRAC meeting on 12 July.
o 19 July: Senate Banking Committee hearing to consider the nominations of (i) Ms. Kathleen Laura Kraninger to be Director of the CFPB and (ii) Ms. Kimberly Reed to be President of the Export-Import Bank.
o 23 July: Comments due to CFTC regarding its Proposed Rule 17 CFR Part 23 Margin Requirements for Uncleared Swap Dealers and Major Swap Participants
o 24 July: Comments due to FDIC regarding: (i) Interagency Supervisory Guidance for the Supervisory Review Process of Capital Adequacy (Pillar 2) Related to the Implementation of the Basel II Advance Capital Framework; (ii) Credit Risk Retention; and (iii) Disclosure Requirements Associated with the Supplementary Leverage Ratio.
o 24 July: Senate Banking Committee hearing to consider the nomination of Elad Roisman to be a Member of the SEC.