US Regulatory Update
Multiple Agencies Extend Comment Period on Volcker Rule Revisions
On 4 September, the Federal Reserve (“Fed”), Federal Deposit Insurance Corporation (“FDIC”), Commodity Futures Trading Commission (“CFTC”), Securities and Exchange Commission (“SEC”), and Office of the Comptroller of the Currency (“OCC”) issued a 30-day joint extension of the comment period on the Notice of Proposed Rulemaking regarding revisions to the Volcker Rule. The comment period will now expire on 17 October; previously it was set to expire on 17 September.
IRS Issues Clarification on SALT Deduction
On 5 September, the Internal Revenue Service (“IRS”) issued a clarification that businesses can continue to deduct charitable donations as normal business expenses. In August, the IRS proposed rules to prevent states from circumventing the new cap on individual state and local tax deductions (“SALT”), with those rules requiring taxpayers to subtract from their federal charitable deduction any state incentives, such as tax credits, received as a result of the donation. The recent clarification means that businesses making business-related payments to charities or government entities can still be allowed to deduct the payments as business expenses even if the businesses received a state or local tax credit in return for the payments.
House Financial Services Subcommittee Hearing on the Cost of Regulation on Housing Development
On 5 September, the U.S. House Committee on Financial Services’ Subcommittee on Housing and Insurance held a hearing entitled “The Cost of Regulation on Affordable Multifamily Development.” Testifying at the hearing were: Susan Ansel, President and Chief Executive Officer on of Gables Residential on behalf of the National Multifamily Housing Council and National Apartment Association; Erika Poethig, Vice President and Chief Innovation Officer at The Urban Institute; James Schloemer, Chief Executive Officer of Continental Properties Company; and Steven Lawson, Chairman of The Lawson Companies on behalf of the National Association of Home Builders. Subcommittee Chairman Sean Duffy (R-WI) opened the hearing noting that “[t]he lack of [housing] development is especially concerning because while we continue to enjoy some of the lowest rates of unemployment in our history, people are having trouble finding affordable housing in areas they are being offered jobs.” Ms. Ansel said policymakers at all levels of government must recognize that a solution to the affordable housing crisis requires a partnership between government and the private sector. Mr. Lawson pointed out that housing development costs have risen because regulations have moved beyond basic safety and soundness consideration and morphed into expensive code changes, energy efficiency mandates, and restrictive land use policies. The witnesses all agreed that a pragmatic approach to regulation is needed to cut costs on development which will cut the cost of housing.
House Financial Services Subcommittee Hearing on the Future of Money
On 5 September, the U.S. House Committee on Financial Services’ Subcommittee on Monetary Policy and Trade held a hearing entitled “The Future of Money: Coins and Banknotes.” Leonard Olijar, Director of the U.S. Bureau of Engraving and Printing, and David Ryder, Director of the U.S. Mint (“Mint”), testified at the hearing. Subcommittee Chairman Andy Barr (R-KY) noted that despite all of the recent innovations in payment settlement, coins and bills are still an integral part of our economy. Several subcommittee members were concerned with the cost of producing coins and bank notes when compared with their stated value. Mr. Ryder said the Mint is investigating alternative metals for minting coins and a way to increase the use of pennies already in circulation, which would curb the need to mint more pennies. When asked about counterfeiting, both Mr. Olijar and Mr. Ryder said that counterfeiting remains a major concern but that they continue to work with the US. Secret Service to combat it.
Senate Banking Hearing Regarding Russia Sanctions
On 6 September, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Outside Perspectives on Russia Sanctions: Current Effectiveness and Potential for Next Steps.” Testifying at the hearing were: Daniel Fried, former Assistant Secretary of State for European and Asian Affairs; Michael McFaul, former U.S. Ambassador to the Russian Federation; Heather Conley, former Deputy Assistant Secretary of State for Eurasian Affairs; and Rachel Ziemba, Adjunct Senior Fellow at the Center for a New American Security. Committee Chairman Mike Crapo (R-ID) said that the malicious cyber operations carried out by Russia remain a significant threat and that sanctions on Russia are complicated by Russia’s integration into the global economy. Regarding Russia’s election interference, Senator Chris Van Hollen (D-MD) spoke in support of S. 2313, the Defending Elections from Threats by Establishing Redlines Act, a bill he introduced with Senator Marco Rubio (R-FL). That bill provides specific penalties for election interference. Mr. McFaul and Mr. Fried both said they supported prospective sanctions as a deterrent. This hearing was the second of three regarding Russian sanctions. The next hearing is scheduled for 12 September and will focus on potential “new tools” that could be used to punish Russia.
House Financial Services Committee Hearing on GSE Reform
On 6 September, the U.S. House Committee on Financial Services held a hearing entitled “A Failure to Act: How a Decade without GSE Reform Has Once Again Put Taxpayers at Risk.” Edward DeMarco, President of the Housing Policy Council, Phillip Swagel, Professor at the University of Maryland School of Public Policy, Nikitra Bailey, Executive Vice President at the Center for Responsible Lending, and Edward Pinto, Co-Director of the Center on Housing Markets and Finance, testified at the hearing. In his opening statement, Committee Chairman Jeb Hensarling (R-TX) announced that he and Representative John Delany (D-MD) have released a bi-partisan discussion draft that would repeal the charters of Fannie Mae and Freddie Mac (together “GSEs”) and transition to a system that allows qualified mortgages backed by an approved private credit enhancer with regulated, diversified capital resources to access explicit, full government securitization guarantees provided by Ginnie Mae. Mr. DeMarco echoed Chairman Hensarling’s desire to revoke the GSEs’ charters and said the GSEs should compete on the same footing as everyone else in the market place. Mr. Swagel said innovation will continue to be stifled if the GSE system is not reformed.
House Financial Services Subcommittee Hearing on Terrorist Financing
On 7 September, the U.S. House Committee on Financial Services’ Subcommittee on Terrorism and Illicit Finance held a hearing entitled “Survey of Terrorist Groups and Their Means of Financing.” Testifying at the hearing were: Katherine Bauer, Fellow at the Washington Institute for Near East Policy; Colin Clarke, Senior Policy Scientist for the RAND Corporation; Yaya Fanusie, Director of Analysis for the Center on Sanctions and Illicit Finance at the Foundation for Defense of Democracies; Oren Segal, Director of Extremism at the Anti-Defamation League; and Ali Soufan, Chairman and Chief Executive Officer of The Soufan Center. Subcommittee Chairman Stevan Pearce (R-NM) asked whether oil is still a large revenue source for ISIS. Mr. Clarke responded that ISIS has lost “98 percent” of its territory and has moved back into Northeastern Syria in an attempt to re-control oil. Ms. Bauer also pointed out that recent reports show that Hezbollah is facing a financial crisis due to the increase in sanction actions. Subcommittee Ranking Member Ed Perlmutter (D-CO) noted that the Financial Action Task Force (“FATF”) has issued guidance on combatting terrorist financing but that the guidance does not mention cryptocurrencies. Mr. Fanusie said that the FATF has signaled it will update its guidance to cover cryptocurrency and that there needs to be clarity on how cryptocurrencies differ from simple wire transfers. Responding to a question from Representative Scott Tipton (R-CO) regarding the ability to track transactions using blockchain technology, Mr. Fanusie said that blockchain is a “different ball game” compared to simple wire transfers and that software needs to be developed in order to create tools that can track and trace blockchain transactions.
On 5 September, the U.S. Senate voted to confirm Elad Roisman to become a Commissioner at the SEC.
SEC & Securities
FINRA Proposes Higher Position Limits for ETF Options Contracts
On 4 September, the Financial Industry Regulatory Authority (“FINRA”) proposed an increase of position limits on several of the most-traded options contracts on exchange traded funds (“ETFs”), such as the PowerShares QQQ Trust and S&P’s Depository Trust. The proposal is intended to increase liquidity and add depth to the market. FINRA claims that “if certain position limits are appropriate for the options overlying the same index, or an analogue to the basket of securities that the ETF tracks, then those same economically equivalent position limits should be appropriate for the option overlying the ETF.” The proposed increase is subject to a 60-day comment period.
SEC Charges Cannabis Investment Fund and Founder in Fraudulent Scheme
On 5 September, the SEC announced that it had “charged a Texas-based investment fund with defrauding investors with false promises of massive returns in cannabis-related investments.” The SEC also issued an alert warning investors about securities offerings related to marijuana.
CE Council and FINRA Request Comment on Potential Enhancements to Continuing Education
On 6 September, the Securities Industry/Regulatory Council on Continuing Education (“CE Council”) and FINRA announced they are seeking comment on enhancements to the continuing education requirements for registered persons. The CE Council is seeking to enhance its efforts to: communicate regulatory developments to the industry via the Regulatory Element in a timely fashion; improve coordination between the Firm Element and Regulatory Element programs; allow for diverse instructional formats that facilitate the learning of a variety of content; identify and reduce redundancy among training requirements and programs; ensure all registered professionals in the industry receive adequate training; enable previously registered individuals to maintain their qualification status by satisfying continuing education requirements while out of the industry; and consider more defined minimum standards of CE for the industry. Comments are due by 5 November.
SEC Temporarily Suspends Exchange-Traded Investment Vehicles
On 9 September, the SEC announced that it had temporarily suspended the trading of two exchange-traded notes: Bitcoin Tracker One and Ether Tracker One. In the order, the SEC said the decision was in “the public interest” and that the reason for the suspension was “confusion amongst market participants” regarding the nature of the financial instruments. Specifically, the SEC pointed out that “[t]he broker-dealer application materials submitted to enable the offer and sale of these financial products in the U.S., as well as certain trading websites, characterize them as 'Exchange Traded Funds,’” while “[o]ther public sources characterize the instruments as 'Exchange Traded Notes,’” and “the issuer characterizes them in its offering materials as 'non-equity linked certificates.'" The temporary suspension is in place through 20 September.
SEC Names New Director of the Office of Municipal Securities
On 4 September, the SEC announced that Rebecca Olsen has been named Director of the Office of Municipal Securities; she has been serving as Acting Director since September 2017.
CFTC & Derivatives
CFTC Chairman Giancarlo Delivers Remarks Regarding EU Regulations
On 4 September and 6 September, CFTC Chairman Chris Giancarlo delivered remarks to the City Guildhall, London, United Kingdom, and remarks at the Eurofi Financial Forum in Vienna, Austria. In those speeches, Giancarlo said that the CFTC is guilty of overreach by regulating firms that are not based in the U.S. but do business with U.S. customers. He said that this “overly expansive, unduly complex” system has shown insufficient deference to other countries and that the CFTC will soon publish a white paper describing a more thoughtful “next act” for how the U.S. will regulate the cross-border swaps market. Giancarlo also reminded the audiences that the draft European Union (“EU”) law that would give EU regulators a role in supervising U.S.-based clearing houses that service EU customers is “not something that [the CFTC] would support.” Chairman Giancarlo said the EU proposal would lead to “overlapping and confounding cross-border regulation, with its high regulatory cost and constraints on economic growth.”
Berkovitz Sworn in as CFTC Commissioner
On 7 September, Dan Berkovitz was sworn in to serve as a Commissioner for the CFTC.
FDIC Board Member Raises Concerns About Proposed Change to Enhanced Supplementary Leverage Ratio
On 6 September, FDIC Board Member Martin Gruenberg spoke at the Peterson Institute about the Fed’s and OCC’s April 2018 joint notice of proposed rulemaking (“NPR”) regarding the enhanced supplementary leverage capital ratio, which is an unweighted measure of equity as a percentage of an institution’s exposures. The NPR proposes to reduce the required six percent enhanced supplementary leverage ratio to a range of lower ratios, from 3.75 percent to 4.75 percent. Gruenberg said the proposed rule would result in a $121 billion reduction in the aggregate effective capital requirements of the lead banks of the eight U.S. global systemically important banking organizations (“G-SIBs”). Gruenberg then detailed his concerns with such a development, including his expectation that the reduction would make the G-SIBs “more likely to fail under stressful conditions.”
· 12 Sept: Senate Banking Committee hearing on Russia sanctions mentioned above.
· 12 Sept: The Financial Stability Oversight Council will hold an executive session to discuss, among other things, (i) the Council’s fiscal year 2019 budget, (ii) the Council’s 2018 annual report, and (iii) an update on the annual reevaluation of the designation of a nonbank financial company.
· 12 Sept: CFTC Chairman Giancarlo to speak at ISDA’s Industry and Regulators Forum in Singapore.
· 13 Sept: Senate Banking Committee hearing entitled “Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act.”
· 13 Sept: SEC Investor Advisory Committee Meeting to discuss: (i) the proxy voting infrastructure, (ii) the proposed Transaction Fee Pilot, and (iii) the implications of passive investing.
· 17 Sept: BCFP will hold a symposium entitled “Building a Bridge to Credit Visibility.”
· 20 Sept: The SEC will hold an investor roundtable to discuss the Commission’s recently proposed rules regarding the obligations of financial professionals to investors.