US Regulatory Update
GAO Releases Report on Federal Cybersecurity Challenges
On 25 July, the Government Accountability Office (“GAO”) released a report titled “Urgent Actions Are Needed to Address Cybersecurity Challenges Facing the Nation.” The GAO identified four major cybersecurity challenges and ten critical actions the federal government and other entities need to take in order to address the challenges:
· Establishing a comprehensive cybersecurity strategy and performing effective oversight. Critical actions needed: (i) “[d]evelop and execute a more comprehensive federal strategy for national cybersecurity and global cyberspace”; (ii) “[m]itigate global supply chain risks”; (iii) “[a]ddress cybersecurity workforce management challenges”; and (iv) “[e]nsure the security of emerging technologies.”
· Securing federal systems and information. Critical actions needed: (i) “[i]mprove implementation of government-wide cybersecurity initiatives”; (ii) “[a]ddress weaknesses in federal agency information security programs”; and (iii) “[e]nhance the federal response to cyber incidents.”
· Protecting cyber critical infrastructure. Critical action needed: “[s]trengthen the federal role in protecting the cybersecurity of critical infrastructure.”
· Protecting privacy and sensitive data. Critical actions needed: (i) “[i]mprove federal efforts to protect privacy and sensitive data”; and (ii) “[a]ppropriately limit the collection and use of personal information and ensure that it is obtained with appropriate knowledge or consent.”
U.S. House Passes Short-Term NFIP Extension
On 25 July, the U.S. House of Representatives passed, by a vote of 366-52, a four-month extension to the National Flood Insurance Program (“NFIP”). The NFIP was set to expire on 31 July 2018. The extension does not contain any reforms to the current program and the U.S. Senate must still pass the extension in order to prevent a lapse in the program.
U.S. House Committee on Financial Services Advances Seven Bills
On 24 July, seven bills were approved by the U.S. House Committee on Financial Services, including:
· H.R. 2570, the Mortgage Fairness Act, which would amend the Truth in Lending Act to clarify that the points and fees in connection with a mortgage loan do not include certain compensation amounts already taken into account in setting the interest rate on such loan.
· H.R. 3626, the Bank Service Company Examination Coordination Act, which would enhance state and federal regulators’ ability to coordinate examinations and share information on a bank’s technology vendors and partners.
· H.R. 5036, the Financial Technology Protection Act, which would establish an Independent Financial Technology Task Force to improve coordination between the private and public sectors to research and develop legislative and regulatory proposals to decrease terrorist and illicit use of new financial technologies, including digital currencies.
· H.R. 5059, the State Insurance Regulation Preservation Act, which would create a definition of an “Insurance Savings and Loan Holding Company” (“ISLHC”) and create a regulatory framework that would limit the Federal Reserve Board’s (“Fed”) oversight of ISLHCs.
· H.R. 6332, the Improving Strategies to Counter Weapons Proliferation Act, which would require the U.S. Department of Treasury’s Financial Crime Enforcement Network to report to Congress annually for five years on the intelligence products it generates from Bank Secrecy Act filings on proliferation finance transactions moving through the U.S. financial system.
U.S House Adopts Conference Report on Legislation Reforming CFIUS Review Process
On 26 July, the U.S House passed, by a vote of 359-54, the conference report on H.R. 5515, the John S. McCain National Defense Authorization Act for Fiscal Year 2019. That legislation is designed to reform and modernize the review process of the Committee on Foreign Investment in the United States (“CFIUS”). The legislation would, among other things, broaden the types of transactions subject to CFIUS review and extend CFIUS review timeframes.
U.S. House Agriculture Committee Hearing Examining the Upcoming Agenda of the CFTC
On 25 July, the U.S. House Committee on Agriculture held a hearing entitled “Examining the Upcoming Agenda for the Commodity Futures Trading Commission [(“CFTC”)].” CFTC Chairman Chris Giancarlo was the sole witness for this hearing. Several members expressed concern regarding the European Union’s (“EU”) desire to “reset” the regulatory equivalency regime with the U.S. with regards to central clearinghouses, Chairman Giancarlo said dialogue with the EU continues and the EU Parliament has made some small concessions but the most recent EU proposal would impose EU laws on U.S. clearinghouses. Giancarlo noted that the London Clearing House may not be an option for the EU after Brexit, making it all the more critical that the U.S. and EU come to terms. In response to a general question on the de minimis threshold for swap dealers under the Volcker Rule, Giancarlo explained that the CFTC chose to keep the threshold at $8 billion after they studied the impact of dropping the threshold from $8 billion to $3 billion, because the CFTC found that a $3 billion threshold captured only small and community banks or local utility companies, which represent “less than 1 percent of the activity in the market.” Chairman Giancarlo also noted that he is having conversation with Fed Vice Chairman of Supervision Randy Quarles on how capital requirements, particularly the supplemental leverage ratio, are affecting market liquidity.
Joint Economic Committee Hearing on the Economy and Access to Capital
On 25 July, the Joint Economic Committee of the U.S. Congress held a hearing entitled “The Innovation Economy, Entrepreneurship, and Barriers to Capital Access.” Phil Mackintosh, Global Head of Economic Research at Nasdaq, Rachel King, CEO of GlycoMimetics, and Lisa Mensah, President and CEO of Opportunity Finance Network, provided testimony for the hearing. Representative Carolyn Maloney (D-NY) asked the panel about the state of the IPO market, and Mr. Mackintosh replied that currently there has been an increase in larger IPOs but a decrease in smaller IPOs. He believes the reason for this trend is that companies are waiting to get bigger before going public and that the private equity market is better organized, thus making it easier for companies to access private capital. Representative John Delany (D-MD) expressed concern over the statistic that most venture capital money goes to only 50 counties and wondered what Congress can do to help change this statistic. Ms. King said smaller communities need to incentivize capital and help venture capitalists recognize the opportunities in other counties. Mr. Mackintosh believes one likely reason venture capital money is concentrated in a small number of counties is that companies are choosing to move closer to their financial backers; however, he believes the impact concentration has on the distribution of labor can be minimized with the continued proliferation of remote work.
On 24 July, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the nominations of Elad Roisman to be a Commissioner of the Securties and Exchange Commission (“SEC”); Michael Bright to be President of the Government National Mortgage Association; Rae Oliver Davis to be the 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 U.S. Department of the Treasury. Several Senators asked Mr. Roisman about his opinions on the SEC’s proposed Regulation Best Interest, and Mr. Roisman answered that he would like to examine various aspects of the proposed rule, including whether customers understand the nature of their relationship with their advisors, conflicts of interest concerns, and whether the proposed rule is “business model neutral.” Mr. Roisman also stressed the importance of public comments on the proposed rule.
On 24 July, the Senate Committee on Agriculture, Nutrition, and Forestry held a hearing on the nominations of Dan Berkovitz to be a Commissioner of the CFTC and James Hubbard to be the Under Secretary of Natural Resources and Environment. In response to questions regarding the finalization of the position limits rules, Mr. Berkovitz said the CFTC needs to establish rules on speculative positions to ensure they do not have a negative impact on commodity prices. Mr. Berkovitz also addressed the CFTC’s proposed changes to the Volcker Rule, stating that the proposed changes, in his opinion, seem to have the intent to lessen compliance obligations on banks with fewer assets and that he looks forward to working with other Prudential Regulators on the proposed rule if confirmed.
On 26 July, the Senate Committee on Finance held a hearing on the nominations of Justin Muzinich to be Deputy Secretary of the Treasury and Michael Desmond to be Chief Counsel for the Internal Revenue Service and an Assistant General Counsel in the Department of the Treasury. Mr. Muzinich expressed his commitment to working with Secretary Mnuchin in carrying out the Treasury Department’s task of “oversight of some of the most critical issues facing our country,’ including: (i) “safeguarding our financial system and implementing sanctions”” (ii) “driving economic growth and opportunity”; (iii) administering the tax system”; (iv) printing the nation’s currency”; and (iv) managing the balance sheet of the U.S. Government. Mr. Desmond stated that “complexity and uncertainty in the tax law create challenges for even the smallest taxpayers” and that he believes “the issuance of timely and accurate guidance is the best way to address those challenges.”
SEC & SECURITIES
SEC Proposes Rules to Simplify and Streamline Disclosures in Certain Registered Debt Offerings
On 25 July, the SEC announced proposed amendments, by a vote of 3-1 with Commissioner Kara Stein dissenting, to revise the financial disclosure requirements in Rule 3-10 and Rule 3-16 of Regulation S-X and create Article 13 in Regulations S-X. The proposed amendments (i) would simplify the disclosure process in registered debt offerings by providing a single set of eligibility criteria that would apply to all issuer and guarantor structures, and (ii) are “intended to provide investors with material information given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens to registrants.” The proposed amendments would create new Rules 13-01 and 13-02 in the new Article 13 of Regulation S-X, and in doing so relocate parts of Rule 3-10 to proposed Rule 13-01 and relocate all of Rule 3-16 to proposed Rule 13-02. Public comments are open until 60 days after the proposed amendments are published in the Federal Register.
SEC Fills Various Staff Leadership Roles
On 25 July, the SEC announced Elizabeth Baird and Christian Sabella as Deputy Directors in the Division of Trading and Markets; Kristin Snyder as Deputy Director of the Office of Compliance Inspections and Examinations (“OCIE”); and Daniel Gregus as National Associate Director of the Clearance and Settlement examination program in the OCIE.
SEC Disapproves Application for Bitcoin ETP Listing
On 26 July, the SEC issued, by a vote of 3-1 with Commissioner Hester Peirce dissenting, an order disapproving the application of the Winklevoss Bitcoin Trust to list and trade its shares (referred to as “exchange-traded products” or “ETPs”) on the Bats BZX Exchange, Inc. (“BZX”). According to the order, the SEC noted that it considered, among other things, whether the proposal is consistent with Securities Exchange Act Section 6(b)(5), which requires that the rules of a national securities exchange be designed “to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.” BZX argued, among other things, that its proposal satisfied the requirements of Section 6(b)(5) because the “geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin” and because “novel systems intrinsic to this new market provide unique additional protections that are unavailable in traditional commodity markets.” In its disapproval of the application, the SEC notes that its decision “does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment,” but rather the proposal failed to satisfy the requirements established under the Securities Exchange Act.
· Commissioner Peirce issued a statement dissenting from the SEC’s decision to disapprove the BZX’s application. In her statement, Commissioner Peirce argued that the SEC misinterpreted Section 6(b)(5) in that the Commission examined the “characteristics of the spot market for bitcoin” when the Commission should have been examining the “ability of BZX—pursuant to its own rules—to surveil trading of and to deter manipulation in the ETP shares listed and traded on BZX.” She states that the BZX application would satisfy the Section 6(b)(5) standard. In addition, she emphasized that the SEC should not seek to inhibit innovation or act as gatekeepers for innovative technologies. She argued that bitcoin ETPs would provide investors with more choices in what they can invest in and that the SEC should only seek to ensure that investor protection mechanisms are in place, as opposed to making a decision on the merit of such products.
CFTC & Derivatives
CFTC Issues Proposed Rule Update for U.S. Markets in Security Futures Products
On 24 July, the CFTC unanimously approved a proposed rule to update a rule impacting exchanges that list security futures products (“SFPs”). The rule would “provide exchanges that list SFPs with greater discretion in setting limit levels.” Specifically, the rule would: (i) “increase the default level of equity SFP position limits to 25,000 (100-share) contracts, from 13,500 (100-share) contracts,” and (ii) “modify the criteria for setting a higher level of position limits and position accountability levels.” Public comments for this proposed rule are open until 24 September.
CFTC Issues Proposed Rule to Streamline Regulations for Swap Dealers
On 24 July, the CFTC unanimously approved a proposed rule to reduce unnecessary burdens on registrants and market participants by simplifying complex notification provisions. The proposal addresses CFTC regulations 23.700 through 23.704, which were implemented to comply with swap dealer notification provisions mandated by the Dodd-Frank Act. Matt Kulkin, Director of the Division of Swaps Dealer and Intermediary Oversight, said the “division staff has found that the prescriptive nature of the CFTC’s rules provides little benefit, if any, and yet, adds a level of complexity that deters end-user swap counterparties from exercising their right to choose to require their funds to be segregated.” Chairman Giancarlo in his supporting statement said, “This proposal looks to reduce the burdens, costs and confusion that have proved counterproductive and discouraged the election of segregation. This proposal will also make it more efficient for counterparties, such as pension funds, insurance companies, and community banks, to be able to elect segregation and receive those protections while hedging their risk in the swaps markets.” Public comments are open until 60 days after this proposal is published in the Federal Register.
· 31 July/1 Aug: Federal Open Market Committee Meeting.
· 1 Aug: FSOC August 2018 Quarterly Refunding Meeting.
· 2 Aug: CFTC Chairman Giancarlo to deliver the Keynote Speech at the West Texas Legislative Summit.
· 7 Aug: Public comments due for the SEC’s proposed Regulation Best Interest.