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US Regulatory Updates

US Regulatory Update


Agencies Issue Joint Statement on Role of Supervisory Guidance

On 11 September, the Federal Reserve (“Fed”), Bureau of Consumer Financial Protection (“BCFP”), Federal Deposit Insurance Corporation (“FDIC”), National Credit Union Administration, and Office of the Comptroller of the Currency (“OCC”) issued a joint statement clarifying the role of supervisory guidance.    The statement notes that “[u]nlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.”  The agencies also said they “will aim to reduce the issuance of multiple supervisory guidance documents on the same topic” and will seek to limit the use of numerical thresholds or other “bright-line” tests.  Finally, the agencies said they will limit examination and supervisory citations to violations of laws, regulations, or enforcement orders and that their respective “examiners will not criticize a supervised financial institution for a ‘violation’ of supervisory guidance”; however, supervisory guidance may be used to reference “examples of safe and sound conduct.” 

President Trump Signs Executive Order to Punish Foreign Election Meddling

On 12 September, President Trump issued an executive order aimed at punishing foreign actors who interfere with U.S. elections.  The order states that any foreign state or entity found to have meddled with U.S. elections can be subject to penalties.  It also directs the intelligence community to spend 45 days after every election assessing whether or not any election meddling occurred.  If election meddling is found, the Office of the Director of National Intelligence must send a report to the Department of Homeland Security and the Department of Justice, who then have 45 days to assess the information and produce their own report.  Any foreign entity or individual identified in those reports will have sanctions automatically applied to them, and the Department of the Treasury (“Treasury”) and the Department of State can recommend additional penalties. 

Treasury and IRS Issue Proposed Regulations on GILTI

On 13 September, the Treasury and Internal Revenue Service (“IRS”) issued their first set of guidance on global intangible low-taxed income (“GILTI”).  The guidance is in response to the 2017 Tax Cuts and Jobs Act which requires U.S. shareholders to include GILTI of “controlled foreign corporations in the shareholders’ gross income.”  Under the Tax Cuts and Jobs Act, U.S. taxpayers “owning at least 10 percent of the value or voting rights in one or more [controlled foreign corporations] is required to include its global intangible low-taxed income as currently taxable income, regardless of whether any amount is distributed to shareholders.”  Commenting on the proposed regulations, Treasury Secretary Steve Mnuchin said, “We are providing clarity to taxpayers and closing loopholes that previously allowed for inappropriate international tax planning and shifting profits overseas.”

FSOC Holds Executive Session

On 12 September, the Financial Stability Oversight Council (“FSOC”) held a closed executive session at the Treasury.  At the meeting, FSOC made a final decision to grant the appeal of ZB, N.A. to remove its designation as a systemically important financial institution (“SIFI”), making it the first bank to formally remove the designation at the FSOC’s discretion.  Prudential Financial’s designation as a SIFI was also discussed at the meeting, as well as at the FSOC’s 17 July meeting, according to the newly released minutes. The 17 July minutes revealed that Prudential has continued to submit new information for FSOC regarding its SIFI review.  At the meeting, FSOC also discussed (i) its 2018 annual report, (ii) the ongoing reevaluation of its designation of nonbank financial company, and (iii) the approval of its fiscal year 2019 budget.

U.S. Congress

House Passes Two Financial Services Bills

On 12 September, the U.S. House of Representatives passed two financial services bills:

·         H.R. 5059, the State Insurance Regulation Preservation Act, which creates a definition of an Insurance Savings and Loan Holding Company (“ISLHC”) and creates a regulatory framework that would limit the Fed’s oversight of ISLHCs.

·         H.R. 6411, the FinCEN Improvement Act of 2018, which requires the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to work with foreign intelligence units to thwart the use of virtual currencies used by terrorist groups for illicit activity and money laundering. 

Senate Banking Hearing Regarding New Tools for Russian Sanctions

On 12 September, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Countering Russia: Assessing New Tools.”  Testifying at the hearing were: Leon Aron, Resident Scholar and Director of Russian Studies at the American Enterprise Institute; Elizabeth Rosenberg, Senior Fellow and Director of the Energy, Economics, and Security Program at the Center for New American Security; and Daleep Singh, Senior Fellow at the Atlantic Council and Adjunct Professor at Johns Hopkins University. In his opening statement, Committee Chairman Mike Crapo (R-ID) stressed the importance of getting sanctions against Russia “right.”  During the hearing, President Trump’s executive order (mentioned above) was released, and Senator Mike Rounds (R-SD) asked the panel if the order represents a “line in the sand” by the Trump administration regarding Russia’s election meddling efforts.  Mr. Singh said, “I don’t see how it’s a line in the sand. It would be if there were clearly delineated consequences, or if there were clearly spelled out costs for actions that have already occurred.  To my knowledge, those are not laid out in the executive order.” Ms. Rosenberg pointed out that sanctions are “an excellent area for congressional oversight in order to clarify what the line is across which the United States will not permit Russia to go.”

House Way and Means Committee Advance Tax Bill 2.0

On 13 September, the U.S. House Committee on Ways and Means favorably reported a package of three tax reform bills referred to as “Tax Reform 2.0,” which include, among other things, a permanent extension of individual and business tax cuts that are currently set to expire after 2025 and a permanent cap of $10,000 on individuals’ federal deduction for state and local taxes. The bills are:

·         H.R. 6760, the Protecting Family and Small Business Tax Cuts Act of 2018, which includes the two tax measures described immediately above.

·         H.R. 6757, the Family Savings Act of 2018, which would help local businesses provide retirement plans to their workers and helps workers participate in retirement plans and allow small businesses to join together to create a more affordable 401(k) plan and simplifies the rules for participation in employer plans.

·         H.R. 6756, the American Innovation Act of 2018, which would expand start-up business deduction limits and allow start-up businesses to immediately deduct their start-up or organizational expenses.

House Financial Services Committee Advances Twelve Bills

On 13 September, the House Committee on Financial Services advanced twelve bills:

·         H.R. 2128, the Due Process Restoration Act of 2017, which would provide respondents in Securities and Exchange Commission (“SEC”) enforcement cases the right to have their case removed to a federal district court and out of the SEC’s administrative in-house proceedings.

·         H.R. 4753, the Federal Reserve Supervision Testimony Clarification Act, which would further amend Section 10 of the Federal Reserve Act to require the Vice Chairman of the Fed to testify before the House Committee on Financial Services if the Vice Chairman for Supervision’s position is vacant.

·         H.R. 4758, the FOMC Policy Responsibility Act, which would amend Section 19 of the Federal Reserve Act to require that the Federal Open Market Committee (“FOMC”), rather than the Fed’s Board of Governors, set the interest rates on balances maintained at a Federal Reserve Bank by depositary institutions.

·         H.R. 5534, the Give Useful Information to Define Effective Compliance Act, which would compel the BCFP to (i) issue guidance, including guidance necessary to comply with the law; (ii) establish clear standards for that guidance and how it is issued; and (iii) provide a safe harbor for good faith reliance on guidance issued by the BCFP.

·         H.R. 6021, the Small Business Audit Correction Act of 2018, which would narrowly tailor an exception for privately-held, small non-custodial brokers and dealers in good standing from the requirement to hire a Public Company Accounting Oversight Board-registered audit firm in order to meet the annual Securities Exchange Act Rule 17a-5 reporting obligation.

·         H.R. 6158, the Brokered Deposit Affiliate-Subsidiary Moderation Act of 2018, which would amend the Federal Deposit Insurance Act to exclude affiliates and subsidiaries of insured depository institutions in the definition of “deposit broker.”

·         H.R. 6729, the Empowering Financial Institutions to Fight human Trafficking Act of 2018, which would allow qualified Section 501(c)(3) nonprofit organizations that have information possibly involving human trafficking and money laundering to share, upon notice to the Secretary of the Treasury,  such information with financial institutions, their regulatory authorities, and law enforcement agencies under a safe harbor that offers liability protections.

·         H.R. 6737, the Protect Affordable Mortgages for Veterans Act of 2018, which would provide a technical fix so that recently executed loans refinanced by the Department of Veterans Affairs can remain eligible for pooling in Ginnie Mae securities.

·         H.R. 6741, the Federal Reserve Reform Act of 2018, which would require the FOMC to annually adopt a “plain English” monetary policy strategy and up to three reference rules that can increase policy transparency.

·         H.R. 6743, the Consumer Information Notification Requirement Act, which would establish a federal standard regarding data security and breach notification based on the 2005 Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice. For insurance companies, the bill would preempt state law similar to the way it would cover financial institutions, requiring establishment of standards similar to the federal guidelines but retains sole enforcement authority for state insurance regulators.

·         H.R. 6745, the Access to Capital Creates Economic Strength and Supports Rural America Act, which would amend section 12(g) of the Securities Exchange Act of 1934 to raise to $10 million in assets, among other requirements, the threshold for the SEC’s reporting requirements for issuers that receive support through a federal universal service support mechanism.

·         H.R. 6751, the Banking Transparency for Sanctioned Persons Act of 2018, which would require the Secretary of the Treasury to provide the House Committee on Financial Services and Senate Committee on Banking, Housing, and Urban Affairs with a copy of licenses that authorize financial institutions to conduct transactions benefitting state sponsors of terrorism.

Senator Warren Introduces Climate Disclosure Bill

On 17 September, Senator Elizabeth Warren (D-MA) introduced the Climate Risk Disclosure Act of 2018 which would require public companies to disclose more information about their exposure to risks stemming from climate change. Specifically, the bill would require the SEC to issue rules requiring public companies to disclose their direct and indirect greenhouse gas emissions and their total portfolio of fossil fuel-related assets.  Companies would also have to quantify the effect of emissions-reduction scenarios and detail the companies’ climate risk management strategies. Senators Cory Booker (D-NJ), Jeff Merkley (D-OR), Kamala Harris (D-CA), and Kirsten Gillibrand (D-NY) co-sponsored the legislation.  On 14 September, twenty-nine environmental and investor groups sent a letter of support to Senator Warren saying, “The bill is a necessary step to ensure that shareholders have the information they need to adequately mitigate financial, physical and legal climate-related risks to their investments.”


On 12 September, the U.S. Senate voted to confirm Charles Rettig to become the Commissioner of the IRS.

SEC & Securities

SEC Rescinds Two Proxy Advisory Letters

On 13 September, the SEC staff of the Division of Investment Management issued a public statement saying they had rescinded two staff letters regarding proxy advisory.  The two letters, issued to Egan-Jones Proxy Services and Institutional Shareholder Services, Inc. in 2004 and 2005, respectively, said that mutual-fund managers could outsource their proxy voting decisions to third-party entities when the mutual funds had a conflict of interest.  The staff decided to rescind the letters ahead of the November SEC Roundtable on the Proxy Process in order to “facilitate the discussion at the Roundtable.” 

On 13 September, U.S. House Committee on Financial Services Chairman Jeb Hensarling (R-TX) released a statement on the SEC staff’s proxy advisory letter withdrawals.  Chairman Hensarling said, “The proxy advisory firm duopoly is in serious need of reform and SEC attention. The market power of proxy advisory firms demands greater accountability for these firms’ actions and the information that they provide institutional investors…By exploiting the market for proxy advice, proxy advisory firms have shown way too often that they are more focused on pushing special interest agendas rather than serving investors. It is imperative that we improve the proxy process to uphold transparency, accountability, and integrity that both shareholders and companies deserve and expect.”

On 14 September, SEC Commissioner Robert Jackson issued a statement regarding sharholder voting.  Jackson noted that proxy advisors “serve an important role in the shareholder-voting process” and that he is “concerned that our efforts to fix corporate democracy will by stymied by misguided and controversial efforts to regulate proxy advisors.”  Finally, Jackson expressed concern that “corporate lobbyists’ priorities [will] sidetrack” the Commission’s work in fixing the corporate voting process. 

Chairman Clayton Statement Regarding Staff Views

On 13 September, SEC Chairman Jay Clayton issued a statement regarding the SEC staff’s views, reminding the public that “all staff statements are nonbinding and create no enforceable legal rights or obligations of the Commission or other parties” and that the Commission “will continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments.”

Commissioner Peirce Remarks Regarding Risk and FinTech Innovations

On 12 September, SEC Commissioner Hester Peirce delivered remarks at the Cato Institute’s FinTech Unbound Conference.  In her speech, Commissioner Peirce said the SEC needs to embrace risk in order to foster financial innovation.  Specifically, she said, “[i]f we do not become more comfortable with risk, our helicoptering may so burden fintech innovations that they begin to lumber along at a regulatory pace.”  Peirce was also critical of the Commission for focusing too much on formal regulation for cryptocurrencies.  She argued that “[t]he Commission should not default to a demand that the crypto markets be subject to comprehensive government regulation as a precondition to allowing products linked to those markets to be traded in markets that we regulate.” Regarding investor protection, Peirce said the Commission’s “investor protection role needs to incorporate a commitment to expanding investor access to our financial markets, including through innovative technologies.” Finally, she noted that she has urged the SEC’s Office of Innovation “not to do the innovation [themselves], but to help the innovators navigate the SEC’s complicated processes.”

SEC Holds Investor Advisory Committee Meeting

On 13 September, the SEC’s Investor Advisory Committee (“IAC”) held a meeting to discuss: (i) the proxy voting infrastructure, (ii) the proposed Transaction Fee Pilot, and (iii) the implications of passive investing.

·         Proxy Voting Infrastructure: Shareholder voting participation in proxy voting was a major area of concern for the IAC panel.  Lyell Dampeer, President of U.S. Investor Communications at Broadridge Financial Solutions, objected to criticisms that there currently is no way for shareholders to confirm that their vote was registered and counted.  Many IAC panelists suggested that the proxy voting system should be opened to market solutions, such as blockchain, to improve the ability of shareholders to confirm that their votes were properly registered and tabulated.  Alexander Lebow, co-founder of SAY, a financial technology company that builds shareholder engagement tools, cautioned the SEC to tamper its expectations of blockchain voting because a proxy voting distributed ledger will have to be a permissions-based system, not the more common open and independent distributed ledger typically seen today. 

·         Transaction Fee Pilot: The IAC approved, by a voice vote, a letter (this draft letter was revised during the meeting but the updated version is not yet available) to the agency from the Market Structure Subcommittee that supported the SEC’s proposed Transaction Fee Pilot.  The SEC’s proposed Transaction Fee Pilot would include modifications to the “maker-taker” model, in which exchanges charge traders taking liquidity with access fee rebates payable to the market makers providing the liquidity.  IAC member Paul Mahoney, Professor of Law at the University of Virginia, said the Pilot “would help the Commission decide whether it should regulate access fees in a different way from its current regulation.”

·         Passive Investing: This panel included a discussion regarding the benefits and risks associated with the increase in passive investing, including a discussion of the effects on corporate governance.  Regarding corporate governance, Robert Pozen, Senior Lecturer at MIT Sloan School of Management, stated that “index funds run by smaller managers . . . may try to minimize the time and effort involved in diligent voting and instead robotically follow the recommendations of a proxy voting service.”  The IAC members seemingly agreed that the SEC should be “ambivalent” between passive and active investing strategies. 

Federal Judge Rules ICOs Are Subject to U.S. Securities Laws

On 11 September, the Wall Street Journal reported that Federal Judge Raymond Dearie in the Eastern District of New York had ruled that cryptocurrency crimes around initial coin offerings (“ICOs”) are subject to the U.S. securities-fraud laws.  The case involves charges against Maskim Zaslavskiy, whom federal prosecutors said committed fraud in connection with two ICOs he promoted last year.  Judge Dearie found that a “reasonable jury” could “conclude that Zaslavskiy promoted investment contracts (i.e. securities) through the RECoin and Diamond schemes,” his two ICOs.  The SEC is also pursuing civil charges against Mr. Zaslavskiy in a parallel case.   

SEC Announces Enforcement Actions Involving Crypto Assets

On 11 September, the SEC announced that “TokenLot LLC, a self-described ‘ICO Superstore,’ and its owners will settle charges that they acted as unregistered broker-dealers.”  On the same day, the SEC announced that it had charged Crypto Assets Management LP in the SEC’s “first-ever enforcement action finding an investment company registration violation by a hedge fund manager based on its investments in digital assets.”    

SEC Issues Statement on Early Expiration of the Tick Size Pilot

On 10 September, the SEC issued a public statement that it had decided to grant an exemption to the exchanges and the Financial Industry Regulatory Authority (“FINRA”) to end the quoting and trading requirements of the National Market System Plan to Implement a Tick Size Pilot Program (“Tick Size Pilot”) as of Friday, 28 September.  The Tick Size Pilot began on 3 October 2016 and, according to its terms, is set to expire at the end of trading on Tuesday, 2 October 2018.  The SEC said it had received “several requests” to end the program early on Friday, 28 September, “to address potential operational and other concerns raised by a mid-week shift in the quoting and trading increments of a large number of NMS stocks.”  The data collection and reporting requirements of the Tick Size Pilot, however, will continue as required for six months after the end of the Pilot Period. 

FINRA Releases RegTech Report

On 10 September, FINRA released a report entitled “Technology Based Innovations for Regulatory Compliance (‘RegTech’) in the Securities Industry.”  RegTech, according the FINRA, refers to “new and innovative technologies designed to facilitate market participants’ ability to meet their regulatory compliance obligations.”  Regarding compliance functions, the report points out that the functions “now have the potential to be streamlined using a variety of technologies, such as artificial intelligence (AI), natural language processing, big data and advanced analytics, cloud-based computing, robotics process automation, distributed ledger technology, application program interfaces (APIs) and biometrics.”  FINRA also noted that broker-dealers should pay attention to the following potential regulatory challenges when adopting RegTech:

·         Supervisory Control Systems: Because many RegTech applications may use “highly complex and sophisticated AI algorithms” compliance and business professionals “may not have the technical skills to understand in detail how these algorithms function.”  As a result, firms should ensure that they have reasonable supervisory policies and procedures in place for the supervision and governance of these RegTech tools. 

·         Outsourcing Structure and Vendor Management: When choosing vendors to outsource compliance and reporting functions, broker-dealers should remember that “outsourcing an activity or function to a third-party does not relieve” them of their ultimate responsibility for compliance with all applicable securities laws.

·         Customer Data Privacy: Broker-dealers should consider data privacy rules because many of the RegTech applications involve the collection, analysis, and sharing of customer-related information.

·         Talent and Training: Firms should evaluate their training staffs and training programs to ensure they have the proper personnel for the adoption of RegTech tools.

CFTC & Derivatives

CFTC Chairman Giancarlo Delivers Remarks Regarding Cross-Border Swaps Regulations

On 11 and 12 September, Commodity Futures Trading Commission (“CFTC”) Chairman Christopher Giancarlo delivered remarks at FIA Japan entitled “A New Approach to Cross-Border Swaps Reform: One Market, One Regulator, One Set of Rules” and remarks at ISDA’s Industry and Regulators Forum.  Chairman Giancarlo said that the current system in which the U.S. regulates cross border derivatives is flawed and called for the implementation of “global swaps reform in a manner that is harmonious and effective without fragmenting world markets.”  The purpose of the CFTC’s updating its cross-border approach is to increase cooperation with global regulators to reduce duplicative and overly burdensome regulations and redundant supervision.  Giancarlo pointed to a number of problems and unintended consequences of the CFTC’s approach, including increased complexity, operational impracticality, and a lack of deference to non-U.S. regulators that have implemented similar swaps reforms in their respective jurisdictions.  He concluded his speech by noting that “[g]lobal swaps reforms, properly coordinated, should foster sustainable growth.”

CFTC and MAS Sign Arrangement to Cooperate on FinTech Innovation

On 13 September, the CFTC and the Monetary Authority of Singapore (“MAS”) announced they had entered into an arrangement to cooperate on FinTech innovation.  The agreement focuses on information sharing on FinTech market trends and developments, specifically, the sharing of insights from the CFTC and MAS’ relevant FinTech sandbox, proofs of concept, and innovation competitions.  The agreement also helps facilitate referrals of FinTech companies seeking to enter the U.S. or Singapore markets.  The goal of this agreement is to help companies better navigate and understand each markets’ regulatory regimes and capitalize on opportunities. 

CFTC Commissioner Behnam Delivers Remarks Regarding the CFTC After the 2008 Financial Crisis

On 15 September, CFTC Commissioner Rostin Behnam delivered remarks before the Michigan Agri-Business Association’s 2018 Outlook Conference entitled “Markets and Issues: Lessons Learned and a Path Forward.”  Commissioner Behnam pointed out how the 2008 financial crisis and the Dodd-Frank Act brought the CFTC to the forefront of the effort to bring greater certainty and transparency to the derivatives markets.”  He also expressed optimism that the CFTC will “prioritize completion of the long overdue position limits rule” now that the agency has a full panel of five Commissioners and that the full Commission will vote on a final rule regarding the de minimus exception to the swap dealer definition “before the end of the year.” 


·         17 Sept: BCFP will hold a symposium entitled “Building a Bridge to Credit Visibility.”

·         18 Sept: CFTC Commissioner Quintenz will speak before the ICDA’s Annual European Summit.

·         18 Sept: Senate Banking Committee hearing entitled “Fintech: Examining Digitization, Data, and Technology.”

·         20 Sept: CFTC Commissioner Quintenz will participate in a panel discussion at the Global Innovation Institute.

·         20 Sept: SEC will hold an investor roundtable to discuss the Commission’s recently proposed rules regarding the obligations of financial professionals to investors.

·         21 Sept: SEC-NYU Dialogue on Securities Market Regulation to discuss: (i) regulation, high-frequency trading, and the need for speed in trading; (ii) the incentives and obligations of market makers as automation becomes more prevalent; and (iii) the evolution of liquidity provision and liquidity resiliency.

·         2 Oct: Senate Banking Committee hearing entitled “Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act.”

·         3-4 Oct: CFTC to host first FinTech Conference.

Ianthe Zabel
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