US Regulatory Update
SEC and CFTC Announce Approval of New Memorandum of Understanding
On 28 June, the SEC and the Commodity Futures Trading Commission (“CFTC”) announced that the two agencies had approved a Memorandum of Understanding (“MOU”) to improve coordination and information sharing between the agencies. The MOU updates and enhances the 2008 MOU to make it more relevant and to “promote efficiency in rulemaking, regulatory oversight, and enforcement.” SEC Chairman Jay Clayton said, “This MOU confirms our agencies’ commitment to working together as partners with distinct missions.” CFTC Chairman Christopher Giancarlo echoed, “This MOU strengthens our joint regulatory response, streamlines our partnerships and makes information sharing more seamless and effective.”
U.S. House Passes Four Financial Services-Related Bills
On 25 and 26 June, the U.S. House of Representatives passed these bills:
· H.R. 5783, the Cooperate with Law Enforcement Agencies and Watch Act of 2018, which would limit a financial institution’s liability for maintaining a customer account in compliance with a written request by a federal or state law enforcement agency.
· H.R. 435, the Credit Access and Inclusion Act of 2017, which would amend the Fair Credit Reporting Act to allow the reporting of certain positive consumer-credit information to consumer reporting agencies.
· H.R. 6069, the FIND Trafficking Act, which would direct the Government Accountability Office to report on the use of virtual currencies and online marketplaces in sex and drug trafficking.
· H.R. 4294, the Prevention of Private Information Dissemination Act of 2017, which would amend Section 165 of the Dodd-Frank Act to establish criminal monetary penalties in certain circumstances involving a federal financial regulatory agency’s willful, unauthorized disclosure of “individually identifiable information.”
U.S. House Passes Bill to Restructure and Improve the Operations of CFIUS
On 26 June, the U.S. House of Representatives passed, by a vote of 400 to 2, H.R. 5841, the Foreign Investment Risk Review Modernization Act, which is intended “[t]o modernize and strengthen the Committee on Foreign Investment [(“CFIUS)”] in the United States to more effectively guard against the risk of to the national security of the United States by certain types of foreign investment.”
U.S. Senate Committee on Banking Hearing Regarding Corporate Governance
On 28 June, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Legislative Proposals to Examine Corporate Governance.” Thomas Quaadman, EVP at the U.S. Chamber Center of Capital Markets Competitiveness, Darla Stucky, President and CEO of the Society for Corporate Governance, John Cogan, Professor of Law and Economics at Harvard Law School, and Damon Silvers, Policy Director and Special Counsel at the American Federation of Labor and Congress of Industrial Organizations provided testimony for the hearing. Chairman Mike Crapo (R-ID) asked the panel if long-term retail investors are represented in corporate governance matters and what role proxy advisors play in that representation. Ms. Stucky answered that retail investors are represented by investment managers who largely vote with proxy advisors and that as a result retail investors’ interests are represented. Senator Pat Toomey (R-PA) was concerned that S. 2499 (a bill that would require the Financial Industry Regulatory Authority (“FINRA”) to establish a relief fund to provide investors with the full value of unpaid arbitration awards issued against brokerage firms or brokers regulated by FINRA) may increase fees and cost firms that have not committed any wrongdoing. Mr. Quaadman agreed with those concerns and said he believes the bill will incentivize fines, take resources from FINRA, and result in good actors subsidizing bad actors. Senator Tom Cotton (R-AK) discussed his bill S. 3004, the Small Business Audit Correction Act of 2018, which seeks to correct the increased audit costs for small, non-custodial broker-dealers resulting from the Dodd-Frank Act. Mr. Quaadman expressed his support for this legislation and said that it “is a good way to rebalance the system” between public and private companies.
U.S. Senate Committee on Banking Hearing Regarding Capital Formation
On 26 June, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Legislative Proposals to Increase Access to Capital.” Raymond Keating, Chief Economist of the Small Business & Entrepreneurship Council, Mercer Bullard, Professor at the University of Mississippi School of Law, and Chris Daniel, Chief Investment Officer of the City of Albuquerque on behalf of the Government Finance Officers Association provided testimony for the hearing. Several Senators spoke favorably of S. 1117, the Consumer Financial Choice and Capital Markets Protection Act, which would allow prime and tax-exempt money market funds to use a stable NAV instead of the floating NAV required by the Securities and Exchange Commission’s (“SEC”) 2014 Amendments to SEC Rule 2a-7. In his oral and written testimony, Mr. Daniel pointed out that municipal governments have been pushed into higher fixed rate bonds since the amendments and that the floating NAV hurts the ability for municipal governments to raise funds and manage their cash. Chairman Mike Crapo (R-ID) asked Mr. Keating about the feedback his organization has received from its members since the passage of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act. Mr. Keating said there is more optimism from small business, but concerns remain over receiving bank loans.
U.S. House Committee on Financial Services Hearing Analyzing the Implications of De-Risking
On 26 June, the U.S. House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “International and Domestic Implications of De-Risking.” Michael Clements, Director of Financial Markets and Community Investment at the Government Accountability Office, Sue Eckert, Adjunct Senior Fellow at the Center for New American Security, Gabrielle Haddad, COO of Sigma Ratings Inc., John Lewis, appearing on behalf of the National Association of Federally-Insured Credit Unions, and Sally Yearwood, Executive Director of Caribbean-Central American Action provided testimony for the hearing. Subcommittee Chairman Blaine Luetkemeyer (R-MO) asserted that “[t]he overly-punitive supervisory and examination tactics employed by federal financial regulators that came in the wake of the financial crisis have had dramatic implications on the availability of financial products and services in all of our communities.” In her testimony, Ms. Haddad said de-risking has had a significant impact on the concentration of trade flows and cross-border payments which “challenges financial stability and inclusion” in the affected markets. She further advocated the need for avenues for participation in the markets for emerging market institutions that demonstrate commitment to international best practices. Many members of the subcommittee agreed that Congress should continue to examine the issue to identify the key drivers of de-risking and consider regulatory and legislative opportunities to ensure equal and consistent access to the financial system.
SEC & Securities
SEC Approves Final and Proposed Rules at Open Meeting
On 28 June, the SEC voted on and approved five final and proposed rules:
· Amendments to the “Smaller Reporting Company” Definition: The amendments raised the threshold in the “smaller reporting company” definition, thereby expanding the number of smaller companies eligible to comply with the SEC’s current scaled disclosure requirements. Specifically, the thresholds were raised: (i) with respect to public float, from $75 million to $250 million; and (ii) with respect to revenue, from less than $50 million annual revenue with no public float to less than $100 million annual revenue and either no public float, or public float of less than $700 million. The amendments were adopted by a unanimous vote.
· Amendments to eXtensible Business Reporting Language (“XBRL”) Requirements: The amendments require the use of the Inline XBRL format for the submission of operating company financial statement information and fund risk/return summary information and make related changes. The amendments are also intended to decrease, over time, the cost of preparing the data for submission to the Commission. The amendments were adopted by a vote of 4-1, with Commissioner Hester Peirce dissenting. Commissioner Peirce expressed concern over mandating the use of Inline XBRL by smaller reporting companies and funds when the Commission has not “adequately addressed the question of whether smaller operating companies should be exempt from the requirement.”
· Proposed Rule 6c-11 and Amendments to Form N-1A: Proposed Rule 6c-11 would permit exchange-traded funds (“ETFs”) that satisfy certain conditions to operate within the scope of the Investment Company Act of 1940 and come directly to market without the cost and delay of obtaining an exemptive order. The Commission believes this will facilitate greater competition and innovation in the ETF marketplace by lowering barriers to entry. The proposal recommends rescinding exemptive relief previously granted to ETFs that would be able to rely on the rule. Also, the Commission proposed several amendments to Form N-1A to help provide more useful, ETF-specific information to investors. These proposals passed by a unanimous vote.
· Amendments to Public Liquidity-Related Disclosure Requirements for Open-End Funds: Under the amendments, funds must discuss in their annual or semi-annual shareholder report the operation and effectiveness of their liquidity risk management programs. This requirement replaces a pending requirement that funds publicly provide a quantitative end-of-period snapshot of historic aggregate liquidity classification data for their portfolios on Form N-PORT. The amendments were adopted by a vote of 3-2, along party lines.
· Proposed Whistleblower Rule Amendments: The proposed rules would, among other things, provide the Commission with additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute. The proposal passed by a vote of 3-2, along party lines.
SEC Commissioner Michael Piwowar Remarks Before the U.S. Chamber of Commerce
On 29 June, SEC Commissioner Michael Piwowar spoke before the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. While discussing SEC Proposed Regulation Best Interest, Commissioner Piwowar said public comments will be crucial in shaping the agency’s reform of investment advice standards. Piwowar, who departed the SEC on 7 July, said the comment review period will take a long time and he anticipates the “staff and the commissioners are going to take a lot of meetings this fall on [the proposed rule].” He also stated that he believes that the proposed rule will not be voted on until next year. Comments on Proposed Regulation Best Interest are due 7 August.
SEC Office of Investor Advocate FY 2019 Report on Objectives
On 29 June, the SEC’s Office of Investor Advocate (“OIA”) published its FY 2019 Report on Objectives, which sets out the OIA’s objectives for FY 2019. The OIA identified nines areas of focus: (i) public company disclosure; (ii) equity market structure; (iii) fixed income market reform; (iv) accounting and auditing; (v) standards of conduct for broker-dealers and investment advisers; (vi) exchange-traded funds; (vii) enhanced disclosure for mutual funds and variable annuities; (viii) transfer agents; and (ix) the impact of Kokesh v. SEC on enforcement actions.
SEC Commissioner Robert Jackson Remarks Regarding Market Structure
On 27 June, Bloomberg reported on SEC Commissioner Robert Jackson’s remarks before the Healthy Markets Association’s Healthy Market Structure Conference. Commissioner Jackson suggested that the split role exchanges play should be reviewed because it may not be the best way to protect investors. Jackson’s concern is that “the self-regulatory organization [(“SRO”)] structure, when merged with a profit-making entity, just may not be compatible.” Jackson said the SRO’s dual role of policing securities markets and maximizing profits could conflict with the sale of market data. Finally, he suggested examining the way exchange committees operate, the way exchange committees interact with exchange management, and how to improve pricing disclosures.
CFTC & Derivatives
CFTC Announces Proposed Amendments to Ease Regulatory Burdens for SROs
On 28 June, the CFTC unanimously approved proposed amendments to its regulations to simplify obligations imposed on an SRO when carrying out its financial surveillance program for futures commission merchants (“FCMs”). Currently, SROs are required by Regulation 1.52 to routinely conduct examinations of FCMs and their compliance with minimum capital, customer fund protection, recordkeeping, and reporting requirements. The proposed amendments would, among other things, (i) revise the scope of a “third-party expert’s evaluation of an SRO’s financial surveillance system to only encompass an assessment of the SRO’s FCM examination standards for consistency with auditing standards issued by the Public Company Accounting Oversight Board” (“PCAOB”); (ii) “require an SRO to promptly review and implement any material changes in the PCAOB auditing standards;” and (iii) “require an SRO to engage a third-party expert to assess any material changes in its FCM examination standards resulting from the PCAOB revising or issuing new audit standards.” Public comments are due 60 days after the proposed amendments are published in the Federal Register.
CFTC Announces Members of the Markets Risk Advisory Committee
On 27 June, CFTC Commissioner Rostin Behanm announced the members of the CFTC’s Market Risk Advisory Committee (“MRAC” or “Committee”) and the date of the MRAC’s first public meeting (12 July). The Committee was first charted in 2014 to “support the Commission’s efforts to detect and mitigate risks within the market for industry participants, consumers, and the broader financial community.” The 12 July meeting will focus on the Committee’s priorities and agenda and the current initiatives to reform the London Interbank Offered Rate. The meeting is open to the public and is also available via teleconference.
o 9 July: Comments due on the SEC’s proposed rule regarding “covered investment fund research reports.”
o 11 July: FDIC Advisory Committee on Community Banking meeting.
o 12 July: CFTC Market Risk Advisory Committee meeting.
o 12 July: House Financial Services Committee hearing entitled “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.”
o 12 July: Senate Banking Committee hearing entitled “An Overview of the Credit Bureaus and Fair Credit Reporting Act.”
o 12 July: House Financial Services Committee Subcommittee on Terrorism and Illicit Finance hearing entitled “Countering the Financial Networks of Weapons Proliferation.”
o 13 July: Comments due on Fed/FDIC/OCC joint proposal on banking organizations’ implementation of the current expected credit losses methodology.