US Regulatory Update
President Trump Signs CFIUS Reform Bill Into Law
On 13 August, President Trump signed into law H.R. 5515, the John S. McCain National Defense Authorization Act for Fiscal Year 2019. The bill includes S. 2098, the Foreign Investment Risk Review Modernization Act of 2018, which expands the jurisdiction and the powers of the Committee on Foreign Investment in the United States’ (“CFIUS”) national security review process. The expansion shifts the focus from whether a foreign investor could control a U.S. business to whether the investor is “non-passive.” The bill also introduces for the first time a category of mandatory filings with CFIUS. The Department of the Treasury (“Treasury”) Secretary Steven Mnuchin remarked that this bill “delivers much-needed reforms that will ensure CFIUS has the tools necessary to identify, examine, and address national security concerns arising from foreign investment.”
CBO Projects U.S. Economy to Grow by 3.1 Percent in 2018
On 13 August, the Congressional Budget Office (“CBO”) issued “An Update to the Economic Outlook: 2018 to 2028,” which projects the U.S. economy to grow by 3.1 percent in 2018, down from the CBO’s April projection of 3.3 percent. The CBO also projects the U.S. economy’s growth to slow in 2019 to an estimated 2.4% due to slowing growth in business investment and government purchases.
GOP Senators Send Letter to Fed Vice Chairman Randy Quarles
On 17 August, seven Republican senators sent to Randy Quarles, the Federal Reserve Board (“Fed”) Vice Chairman for Supervision, a letter expressing the senators’ concerns regarding recent public remarks made by Fed Chairman Powell and Vice Chairman Quarles regarding implementation of S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act. That bill provides that financial companies with total assets of less than $250 billion generally are to be granted automatic relief from enhanced prudential standards unless the Fed determines any such company is at risk from the perspective of financial stability or safety and soundness. The senators wrote that the Fed officers’ recent statements conflict with the senators’ “understanding…that S.2155 shifted the assumption that financial companies with less than $250 billion are not systemically risky.”
GOP Senate Finance Committee Members Send Letter to IRS and Treasury
On 16 August, the Republican Members of the U.S. Senate Committee on Finance, led by Chairman Orrin Hatch (R-PA), announced they had sent to Treasury Secretary Steven Mnuchin and Internal Revenue Service Acting Commissioner David Kautter a letter asking those officials to “issue guidance that is consistent with the congressional intent” of three specific parts of H.R. 1, the bill that contains the Tax Cuts and Jobs Act of 2017:
· Addressing an error in a statutory cross-reference so that retailers and restaurant owners can write off certain investment costs generally over a 15-year period (section 13204);
· Correcting a drafting error to ensure that the new rules governing net operating losses (“NOLs”) rules apply to NOLs arising in taxable years beginning after December 31, 2017 (section 13302); and,
· Clarifying the statutory language of the ban on businesses from deducting certain legal fees related to sexual harassment, with the clarification being to exclude victims of sexual harassment from the ban (section 13307).
Senator Warren Introduces Bill to Require Large Companies to Create a General Public Benefit
On 15 August, Senator Elizabeth Warren (D-MA) announced a bill, the Accountable Capitalism Act, which would (i) require corporations with more than $1 billion in annual revenue (“large entities”) to obtain federal charters as United States corporations (“U.S. Corporations”) and (ii) establish an “Office of United States Corporations” within the Department of Commerce. Any large entity that does not obtain a federal charter despite being required to do so would not be treated as a corporation, body politic, body corporate, joint stock company, or limited liability company and would not be able to avail itself of any such benefits under federal law. The bill includes the following provisions:
· Office of United States Corporations. The office would be led by a Director appointed by the President and having a maximum term of four years. The office would be responsible for: (i) reviewing and granting charter applications for large entities; (ii) monitoring whether large entities have obtained a charter; (iii) referring violations of the bill to the “appropriate federal agency”; (iv) rescinding or revoking, as appropriate, the charter of United States Corporations; and (v) issuing rules to prevent entities from taking action to avoid qualifying as “large entities.”
· Responsibilities of U.S. Corporations. Each U.S. Corporation would be required to have, among its other purposes, a purpose of creating a “general public benefit,” which is to be identified in the corporation’s charter.
· Board representation. No later than one year following the bill’s enactment, the SEC, in consultation with the National Labor Relations Board, would be required to issue rules to ensure that director elections at U.S. corporations are “fair and democratic.” At least 40% of the directors of a U.S. Corporation would be required to be elected by the employees of the U.S. Corporation pursuant to an election process that complies with the bill’s rules.
· Executive compensation. The bill contains prohibitions on the sale of equity securities or other securities of a U.S. Corporation by directors or officers during a five-year period following acquisition of beneficial ownership of such securities or during a three-year period following a company stock buyback. The SEC could impose civil monetary penalties on persons found to be in violation of these requirements.
· Political spending. U.S. Corporations could not make political expenditures of more than $10,000 in support of or in to opposition any federal, state, or local candidate unless no less than 75% of the shareholders and no less than 75% of the directors approve of the expenditure.
The U.S. Senate Committee on Banking, Housing, and Urban Affairs announced it will hold an executive session on 23 August to vote on the nominations of: Kathleen Laura Kraninger to be Director of the Bureau of Consumer Financial Protection, Kimberly Reed to be President of the Export-Import Bank, Elad Roisman to be a Commissioner of the SEC, Michael Brigh to be President of the Government National Mortgage Association, Rae Oliver Davis to be Inspector General of the U.S. Department of Housing and Urban Development, and Dino Falaschetti to be the Director of the Office of Financial Research at the Treasury.
SEC & Securities
President Trump Asks SEC to Study Six-Month Reporting for Companies
On 17 August, President Trump wrote on Twitter that he asked the Securities and Exchange Commission (“SEC”) to study the possibility of ending quarterly reporting and shifting to a six-month regime for public companies. In the tweet, Trump said he asked “some of the world’s top business leaders” on how to create jobs and make businesses “even better.” Trump said a top business leader suggested, “Stop quarterly reporting & go to a six month system.” SEC Chairman Jay Clayton issued a statement pointing out that “the SEC has implemented…a variety of regulatory changes that encourage long-term capital formation” and that the SEC’s Division of Corporate Finance “continues to study public company reporting requirements, including the frequency of reporting.” Clayton also noted that the SEC “welcomes input from companies, investors, and other market participants” regarding the frequency of reporting and other “important matters.”
SEC Adopts Amendments to Simplify and Update Disclosure Requirements
On 17 August, the SEC announced it has voted to adopt amendments to certain disclosure requirements that have become “duplicative, overlapping, or outdated in light of other Commission disclosure requirements.” The SEC said the amendments are intended to simplify and update disclosures to investors, particularly “Main Street” long-term investors, and to reduce compliance burdens for companies without “significantly altering the total mix of information available to investors.”
FINRA Issues Investor Alert Regarding ICOs
On 16 August, the Financial Industry Regulatory Authority (“FINRA”) issued an Investor Alert entitled “Initial Coin Offerings [(“ICOs”)]—What to Know Now and Time-Tested Tips for Investors.” FINRA issued the alert to “inform investors that investments in digital assets…can involve significant uncertainty, as well as risks that are different from more conventional assets like stocks and bonds.” The alert lists seven lessons retail investors needs to know: (i) “ICOs offer little investor protection”; (ii) “ICO fraud is real”; (iii) “[o]nline platforms that facilitate trading in ICO tokens are not registered exchanges”; (iv) “[i]nvestors are losing millions to ICO theft”; (v) “[r]eceipt of future tokens is not a given in an ICO”; (vi) Simple Agreements for Future Tokens “don’t make ICOs safe”; and (vii) fear of missing out “can inflate ICO valuations.”
MSRB Seeks Input on Draft FAQs Regarding Social Media in Advertising
On 14 August, the Municipal Securities Rulemaking Board (“MSRB”) announced it is requesting comment from regulated entities and other stakeholders on its draft FAQs “addressing the use of social media in advertising by municipal advisors and municipal securities dealers.” The draft FAQs “illustrate the application to social media of [(i)] MSRB G-21 on advertising by dealers [and (ii)] MSRB Rule G-40 on advertising by municipal advisors.” Comments are due by 14 September.
FINRA Reiterates ATS Supervision Obligations
On 13 August, FINRA issued Regulatory Notice 18-25 entitled “FINRA Reminds Alternative Trading Systems of Their Obligations to Supervise Activity on Their Platforms.” The notice reminds Alternative Trading Systems (“ATS”) to evaluate their supervisory
systems to ensure compliance with their supervision obligations, including business continuity, recordkeeping, Regulation ATS, Regulation NMS, Regulation SHO, and the SEC’s Market Access Rule. FINRA expects ATSs’ supervisory systems to be reasonably designed to identify “red flags,” including possibly manipulative or non-bona fide trading that occurs on or through their systems.
· 21 Aug: Senate Banking Committee hearing on Russia sanctions.
· 21 Aug: Senate Health, Education, Labor & Pensions Committee hearing entitled “Financial Literacy: the Starting Point for a Secure Retirement.”
· 22 Aug: Senate Finance Committee hearing on nomination of Michael Faulkender to be Treasury Assistant Secretary for Economic Policy.
· 23 Aug: Senate Banking Committee to vote on nominations referenced above.