US Regulatory Update
Fed Chairman Powell Delivers Speech on Monetary Policy
On 24 August, Federal Reserve (“Fed”) Chairman Jerome Powell delivered remarks at the “Changing Market Structure and Implications for Monetary Policy” symposium entitled “Monetary Policy in a Changing Economy.” In the speech, Powell built a case for gradually lifting rates so long as inflation is stable and unemployment continues to fall. He also defended the Fed’s policy of gradually lifting rates, noting that the Fed faces two major risks, of “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating.” He concluded that “[t]he current path…[is] taking seriously both of these risks.”
Treasury and IRS Issue Release Proposed SALT Regulations
On 23 August, the U.S. Department of the Treasury (“Treasury”) and Internal Revenue Service (“IRS”) released proposed regulations that address several states’ efforts to circumvent the state and local tax (“SALT”) deduction cap of $10,000 put in place by H.R. 1, the bill that contains the Tax Cuts and Jobs Act of 2017. Those efforts center on state and local tax credit programs aimed at allowing taxpayers to characterize certain payments as fully deductible charitable contributions for federal income tax purposes while using the same transfers to satisfy or offset their state or local tax liabilities.” The proposed rule generally would require taxpayers making payments to an entity eligible to receive tax-deductible donations to reduce their federal charitable deduction by the amount equal to any state or local tax credit arising from the contribution. The proposed rule provides a de minimis exception for dollar-for-dollar state and local tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred.
Fed Releases Minutes from 31 July – 1 August Open Market Committee Meeting
On 22 August, the Fed released the minutes from its Federal Open Market Committee Meeting on 31 July – 1 August. The Fed signaled broad support for another interest-rate hike in September due to the economy growing strongly, but it also expressed concern with ongoing trade disputes. Specifically, the minutes said most of the officials “expressed the view that an escalation in international trade disputes was a potentially consequential downside risk for real activity.” The minutes also showed that the Fed discussed what actions they might take if they are forced to push interests rates back down to zero in the next recession. The officials said there was a “meaningful risk” rates could go back to zero during the next decade. The next meeting will be held on 25-26 September.
Senate Finance Committee Hearing on the Nomination of Michael Faulkender
On 22 August, the U.S. Senate Committee on Finance held a hearing to consider the nomination of Michael Faulkender to be an Assistant Secretary for Economic Policy of the Treasury. Committee Chairman Orrin Hatch (R-UT) asked Mr. Faulkender about his research on incentives for companies to transfer profits abroad to lower taxed jurisdictions and how that research will change in light of the new tax code. Mr. Faulkender answered that “the reduction in the corporate income tax rate reduces the wedge between the tax rate they would realize overseas and what they would pay here in the United States.” Ranking Member Ron Wyden (D-OR) asked Mr. Faulkender if he agreed with Treasury Secretary Mnuchin’s assertion that the new tax cuts will pay for themselves and pay down the national debt. Mr. Faulkender said that while he has not personally run the forecasts on the cost of the tax bill at this time, he looks forward to helping generate a “robust analysis of the revenue implications of the tax bill.”
Senate HELP Committee Hearing on Financial Literacy
On 21 August, the U.S. Senate Committee on Health, Education, Labor & Pensions’ (“HELP”) Subcommittee on Primary Health and Retirement Security held a hearing entitled “Financial Literacy: The Starting Point for a Secure Retirement.” Jovita Carranza, Treasurer at the Treasury, Vishal Jain, Vice President of the Workplace Solutions Group at Prudential Financial, Lynn Dudley, Senior Vice President of Global Retirement & Compensation Policy at the American Benefits Council, and Scott Astrada, Director of Federal Advocacy at the Center for Responsible Lending, provided testimony for the hearing. Subcommittee Chairman Michael Enzi (R-WY) suggested in his opening statement that if there was any silver lining to the financial crisis, it is that the crisis served as an example that employee financial health can have significant impacts on productivity. Specifically, Enzi said, “A person cannot be expected to give 100% when they are trying to resolve their own financial crisis, particularly when they don’t have the tools to do so.” Responding to Chairman Enzi’s question on the electronic delivery of retirement plan documents, Ms. Dudley said employers are ready to embrace “e-delivery” and take advantage of the technology. Mr. Jain, offering support for the Retirement Enhancement and Savings Act, a bi-partisan bill that contains a number of provisions to increase voluntary retirement savings, said that “legislation that further encourages and facilitates the use of auto-enrollment and auto-escalation provisions can enhance both retirement plan participation and savings rates.”
Senate Banking Committee Hearing on Russia Sanctions
On 21 August, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Russia Sanctions: Current Effectiveness and Potential for Next Steps.” Chairman Mike Crapo (R-ID) began the hearing by pointing out that the sanctions against Russia are due to military incursions into Ukraine, abetting Syrian government crimes, and conducting cyberwarfare and attacks against U.S. critical infrastructure. Chairman Crapo stated that “Russia is a menace on so many different levels” and that the U.S. must act in order to protect democracies across the globes. Ranking Member Sherrod Brown (D-OH) said the sanctions have had an effect on the Russian economy but urged the U.S. government to “send a more powerful and direct message to Putin and those within his circles.”
On 23 August, the U.S. Senate Committee on Banking, Housing, and Urban Affairs confirmed the nominations of Kathleen Laura Kraninger to be Director of the Bureau of Consumer Financial Protection (by a vote of 13 to 12), Kimberly Reed to be President of the Export-Import Bank (by a vote of 25 to 0), Elad Roisman to be a Commissioner of the U.S. Securities and Exchange Commission (“SEC”) (by voice vote), Michael Bright to be President of the Government National Mortgage Association (by voice vote), Rae Oliver Davis to be Inspector General of the U.S. Department of Housing and Urban Development (by voice vote), and Dino Falaschetti to be the Director of the Office of Financial Research at the Treasury (by voice vote).
On 22 August, Senator Majority Leader Mitch McConnell (R-KY) filed a cloture motion to advance the nomination of Richard Clarida to be Vice Chairman of the Fed. The motion indicates that Mr. Clarida could be confirmed before the Fed’s 25-26 September Federal Open Markets Committee Meeting.
SEC & Securities
SEC Adopts Amendments to Improve Municipal Securities Disclosures
On 20 August, the SEC announced it had adopted amendments to “enhance the transparency in the municipal securities market.” The amendments are to SEC Rule 15c2-12, which requires brokers, dealers, and municipal securities dealers acting as underwriters in primary offerings of municipal securities to “reasonably determine” that the issuer or obligated person agreed to provide timely notice of certain events to the Municipal Securities Rulemaking Board (“MSRB”). The amendments add two new disclosure events: (i) the “[i]ncurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material” and (ii) the “[d]efault, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.”
SEC Lifts Stay on All Administrative Proceedings
On 22 August, the SEC issued an order stating that the SEC will give all the cases pending before its administrative-law judges (“ALJs”) the opportunity for a new hearing. The order was issued in response to the June Supreme Court decision of Lucia v. SEC, in which the Court held that the SEC’s practice of hiring ALJs was unconstitutional. On 10 July, President Trump signed an Executive Order that made ALJs exempt from Civil Service hiring rules and examinations. The SEC’s order states that the Commission will start fresh on all cases and instructs the ALJs to “not give weight to or otherwise presume the correctness of any prior opinions, orders, or rulings.”
SEC Issues Orders and Letters Regarding Listing Applications of Bitcoin-Based ETFs
On 22 August, the SEC Division of Trading and Markets issued three orders disapproving the applications of nine bitcoin-based ETFs sponsored by ProShares, Direxion, and Granite Shares to list and trade on either NYSE Arca or Cboe BZX Exchange. The disapprovals were based on a failure by the exchanges to show that their rules were sufficient to “prevent fraudulent and manipulative acts and practices.” On 23 August, however, the Commission sent letters staying the orders until it orders otherwise.
SEC Chairman Clayton Issues Public Statement on Feedback From Investor Roundtables
On 22 August, SEC Chairman Clayton issued a public statement entitled “Statement on Investor Roundtables Regarding Standards of Conduct for Investment Professionals Rulemaking.” In his statement, Clayton said that “questionable practices,” such as product-based sales contests, should be eliminated. Clayton said eliminating these sales contest practices “would enhance investor protection but would not adversely affect investor choice and opportunity.” Clayton stated, “These investor roundtables have been incredibly valuable, and I have enjoyed engaging directly with our Main Street investors.” He added that after these discussions he found that Main Street investors, “particularly those who appreciate the distinctions between the broker-dealer relationship model and the investment advisor relationship model, want to maintain choice.” However, Clayton said he discovered that “the key differences between broker-dealers and investment advisors are not well understood by many of our Main Street investors.” The SEC announced that it would hold another investor roundtable in Baltimore on 20 September to gather additional feedback on the fiduciary standard.
Consumer Group Sends Letter to SEC Regarding Mandatory Arbitration
On 21 August, 133 members of the Secure Our Savings (“SOS”) initiative sent a letter to SEC Chairman Jay Clayton urging him not to support an end to the SEC’s historical stance that it is a violation of the securities laws to insert mandatory arbitration clauses into company charters. SOS claims that forcing investors to arbitrate their claims individually “would effectively eliminate both the deterrent effect of class-action shareholder lawsuits and the opportunity for these defrauded investors to recover their losses” because “the issues in a typical case of financial fraud are too complex, and the costs of discovery and expert testimony are too high, for these claims to be dealt with effectively through individual arbitration.”
SEC Announces Agenda for Investor Advisory Committee Meeting
On 24 August, the SEC announced the agenda for its 13 September Investor Advisory Committee (“IAC”) meeting. The meeting will consist of panel discussions with outside speakers on (i) US. proxy voting infrastructure and (ii) the implications of passive investing. The committee will also discuss the SEC’s Proposed Transaction Fee Pilot in NMS stocks, which may include a Recommendation of the IAC Market Structure Subcommittee.
SEC Names New Chief Accountant in Enforcement Division
On 23 August, the SEC announced that Matthew S. Jacques had been named the new chief accountant for the SEC’s Division of Enforcement. Mr. Jacques previously worked as a senior enforcement accountant for six years for the SEC’s Boston Regional Office and has been managing director at AlixPartners since 2013. Mr. Jacques will begin working at the SEC in October.
CFTC & Derivatives
CFTC Unanimously Approves Proposed Amendment to Clearing Requirement for Swaps
On 23 August, the U.S. Commodity Futures Trading Commission (“CFTC”) announced it had unanimously approved a proposed rule that would “reduce unnecessary burdens on bank holding companies, savings and loan holding companies, and community development institutions.” The proposed rule would exempt from the clearing requirement “swaps entered into by bank holding companies and savings and loan holding companies with consolidated assets of $10 billion or less, and community development financial institutions that meet certain conditions.” Comments will be accepted for 60 days after the proposed rule is published in the Federal Register.
CFTC Unanimously Adopts Amendments Simplifying CCO Duties
On 21 August, the CFTC announced it had unanimously approved final amendments clarifying and simplifying its (i) regulations governing chief compliance officer (“CCO”) duties and (ii) annual compliance reporting requirements for futures commission merchants, swap dealers, and major swap participants. The announcement states that by adopting the CCO amendments, “the CFTC is also further synchronizing the CCO regulations with the comparable regulations adopted by the [SEC] for security-based swap dealers,” and “[t]he further convergence of the two regimes will allow greater efficiencies for the market intermediaries registered with both agencies.”
· 4 Sept: Comments due on a CFTC proposed rule regarding financial surveillance examination requirements for self-regulatory organizations.