US Regulatory Research
Agencies Propose Changes to Regulations Implementing Volcker Rule
On 18 December, the Federal Reserve (“Fed”), Federal Deposit Insurance Corporation (“FDIC”), Office of the Comptroller of the Currency (“OCC”), Securities and Exchange Commission (“SEC”), and Commodity Futures Trading Commission (“CFTC”) issued proposed rules to exclude certain community banks from the Volcker Rule and to permit, under certain circumstances, a banking entity to share a name with a covered fund that it organizes and offers. Pursuant to Section 203 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), the proposal would exclude community banks from the restrictions of the Volcker Rule if (i) the bank has total consolidated assets equal to or less than $10 billion and (ii) the bank’s trading assets and liabilities are equal to or less than five percent of its total consolidated assets. Additionally, pursuant to Section 204 of the EGRRCPA, the proposal would allow a covered fund to share “the same name or a variation of the same name with . . . an investment adviser to the fund, subject to the conditions” that (i) the investment adviser is not, and does not share the same name as, “an insured depository institution, a company that controls an insured depository institution, or a company that is treated as a bank holding company”; and (ii) the name does not contain the word “bank.” Comments on the proposed rules are due 30 days after their publication in the Federal Register.
FSOC Meets in Executive and Open Sessions and Releases Its Annual Report
On 19 December, the Financial Stability Oversight Council (“FSOC”) met in executive and open sessions. The Council discussed, among other matters: (i) potential amendments to its interpretive guidance on nonbank financial company designations, including an activities-based approach for monitoring and addressing potential risks to U.S. financial stability; and (ii) an update from the Council’s digital assets and distributed ledger technology working group.
On 19 December, the FSOC also released its 2018 annual report, which describes “significant financial market and regulatory developments, potential emerging threats to U.S. financial stability, recommendations to promote U.S. financial stability, and the activities of the Council.” The recommendations in the annual report include:
· “ensur[ing] agencies have the authorities necessary to supervise and enhance third-party service provider information security”;
· “complet[ing] the transition to a new alternative reference rate” by “member agencies work[ing] closely with market participants to identify and mitigate risks from potential dislocations during the transition process”;
· “agencies continu[ing] to monitor levels of nonfinancial business leverage, trends in asset valuations, and potential implications for the entities they regulate in order to assess and reinforce their ability to manage severe, simultaneous losses in those markets”; and
· “federal and state financial regulators continu[ing] to work together to evaluate regulatory overlap and duplication, modernize outdated regulations, and, where authority exists, tailor regulations based on the size and complexity of financial institutions.”
CFPB Announces Policy Guidance on Disclosure of Home Mortgage Data
On 21 December, the Consumer Financial Protection Bureau (“CFPB”) announced final policy guidance describing the Home Mortgage Disclosure Act (“HMDA”) data the Bureau intends to make available to the public beginning in 2019. The HDMA requires lenders to collect, report, and publicly disclose loan-level data about their mortgage applications, originations, and purchases. The Bureau has decided that the property address, applicant’s credit score, and certain other data should be excluded from public disclosure.
Senator Crapo Sends Letter to Agencies Regarding Guidance on Stress Testing for Certain Banks
On 14 December, Senator Mike Crapo (R-ID), Chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs, sent a letter to Fed Chairman Jerome Powell, FDIC Chairman Jelena McWilliams, and Comptroller of the Currency Joseph Otting regarding the status of the joint guidance on stress testing for banking organizations with total consolidated assets of more than $10 billion. According to Senator Crapo, the EGRRCPA “exempts financial companies with less than $100 billion from all stress testing requirements immediately. Some have suggested that the agencies are requiring financial institutions with total assets between $10 billion and $100 billion to conduct stress tests because the [the agencies’] 2012 Guidance is effective and takes priority over EGRRCPA. While the agencies have general supervisory authority over regulated institutions. EGRRCPA supersedes the 2012 Guidance and was clear in its instructions to the agencies that financial companies with less than $100 billion are not to be subject to stress testing.”
Congressman Luetkemeyer Sends Letter to Regulators on Volcker Rule
On 21 December, Congressman Blaine Luetkemeyer (R-MO) sent a letter to Fed Chairman Jerome Powell, FDIC Chairman Jelena McWilliams, Department of the Treasury (“Treasury”) Secretary and FSOC Chairman Steven Mnuchin, Comptroller of the Currency Joseph Otting, SEC Chairman Jay Clayton, and CFTC Chairman Christopher Giancarlo. Luetkemeyer sent the letter to comment on the notice of proposed rulemaking (described above) recently issued by the agencies regarding the exclusion of certain banking entities from the Volcker Rule. According to Congressman Luetkemeyer, the proposed rule “directly contradicts” the EGRRCPA because rather than “implementing the exclusion from the Volcker Rule by simply cross-referencing the statute,” the agencies “chose to rephrase the statutory language in a manner that completely changed the meaning” of the EGRRCPA. As a result, Leutkemeyer said that the agencies should revise the proposed rule “to exclude from the definition of ‘banking entity’ an insured depository if it has, and if every company that controls it has, total consolidated assets of $10 billion or less or total trading assets and trading liabilities, on a consolidated basis, that are 5 percent or less of total consolidated assets.”
House Financial Services Committee Holds Hearing on Housing Finance Reform Act
On 21 December, the U.S. House Financial Services Committee held a hearing entitled “A Legislative Proposal to Provide for a Sustainable Housing Finance System: The Bipartisan Housing Finance Reform Act of 2018.” The hearing had two panels of witnesses representing a number of institutions with interests the residential real estate market. The proposed legislation is aimed at substantially reforming the American housing finance system by winding down Fannie Mae and Freddie Mac (currently in conservatorship) and putting in place a system that ensures market participants will not in the future require taxpayer support. Such a system would include a new program to be established by the Government National Mortgage Association (known as “Ginnie Mae”) to “guarantee payment of securities that are backed by eligible conventional mortgages and protected with private capital.” The proposed legislation also calls for the creation of a “Mortgage Security Market Exchange available to all issuers of residential mortgage-backed securities as a meaningful secondary mortgage alternative to the enterprises [Fannie Mae and Freddie Mac] and the Government National Mortgage Association that facilitates the transition to a post-conservator ship secondary mortgage market.”
The Senate Committee on Banking, Housing, and Urban Affairs will continue to be led by Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) during the 116th Congress. The Committee will continue to have 13 Republican members and 12 Democrat members. Senators Kevin Cramer (R-ND) and Martha McSally (R-AZ) are the new Republican members of the Committee, replacing former Senators Bob Corker (R-TN) and Dean Heller (R-NV). Senators Tina Smith (D-MN) and Kyrsten Sinema (D-AZ) are the new Democrat members, replacing former Senators Heidi Heitkamp (D-ND) and Joe Donnelly (D-IN).
The House Committee on Financial Services will be led by Chairwoman Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC). The full membership of the Committee has not yet been determined.
SEC & Securities
SEC Requests Comments on Quarterly Reporting
On 18 December, the SEC issued a request for comment on the “nature, content and timing” of quarterly reports submitted by reporting companies. The SEC is seeking public input on how it “can reduce burdens on reporting companies associated with quarterly reporting while maintaining, and in some cases enhancing, disclosure effectiveness and investor protections.” Additionally, the SEC is seeking comment on “how the existing periodic reporting system, earnings releases, and earnings guidance, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants.” Comments are due 90 days after the request for comment’s publication in the Federal Register.
SEC Publishes Two Reports on Credit-Rating Agencies
On 18 December, the SEC published two reports, Annual Report on NRSROs and Summary Report of Examinations of Each NRSRO, showing a continued focus on compliance and competition by nationally recognized statistical ratings organizations (“NRSROs”). The annual report on NRSROs discusses the state of competition, transparency, and conflicts of interest among the firms, and the summary report on NRSRO examinations summarizes the SEC staff’s findings and recommendations on the eight review areas required by statute. The reports found that credit rating agencies “continue to promote compliance by enhancing their policies and procedures, and internal controls in response to Commission rules and staff examinations” and that “some firms are self-reporting instances of noncompliance and some smaller firms are continuing to compete with larger firms in certain rating categories.”
SEC Adopts Final Rules for Disclosure of Hedging Polices
On 18 December, the SEC approved final rules “to require companies to disclose in proxy or information statements for the election of directors any practices or policies regarding the ability of employees or directors to engage in certain hedging transactions with respect to company equity securities.” The final rules implement a mandate from the Dodd-Frank Act and include these highlights:
· “New Item 407(i) of Regulation S-K will require a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director.”
· “A company could satisfy this requirement by either providing a fair and accurate summary of the practices or policies that apply, including the categories of persons they affect and any categories of hedging transactions that are specifically permitted or specifically disallowed, or, alternatively, by disclosing the practices or policies in full.”
· “If the company does not have any such practices or policies, the rule will require the company to disclose that fact or state that hedging transactions are generally permitted.”
· “Item 407(i) specifies that the equity securities for which disclosure is required are equity securities of the company, any parent of the company, any subsidiary of the company, or any subsidiary of any parent of the company.”
Companies generally must comply with the new disclosure requirements in proxy and information statements for the election of directors during fiscal years beginning on or after 1 July 2019; however, companies that qualify as “smaller reporting companies” or “emerging growth companies” must comply during fiscal years beginning on or after 1 July 2020.
SEC Holds Open Meeting
On 19 December, the SEC held an open meeting where it voted to:
· approve the 2019 budget of the Public Company Accounting Oversight Board;
· adopt “Rule of Practice 194,” which establishes a process for registered security-based swap dealers (“SBSDs”) and major security-based swap participants to apply for relief from the prohibition in Exchange Act Section 15F(b)(6) on individuals subject to a statutory disqualification from effecting security-based swap transactions on behalf of SBSDs and major security-based swap participants;
· propose new rules 15Fi-3 and 15Fi-5 requiring the application of risk mitigation techniques to portfolios of uncleared security-based swaps; and
· propose a new Rule 12d1-4 and related amendments to Rule 12d1-1, all designed to streamline and enhance the regulatory framework for “fund of funds,” which exist where mutual funds or other funds invest in shares of another fund.
SEC Adopts Transaction Fee Pilot for NMS Stocks
On 19 December, the SEC voted to adopt new Rule 610T of Regulation NMS to conduct a “Transaction Fee Pilot in NMS stocks.” The pilot is “designed to generate data that will help the Commission analyze the effects of exchange transaction fee and rebate pricing models on order routing behavior, execution quality, and market quality generally.” The SEC said it will use data from the Pilot “to facilitate an empirical evaluation of whether the exchange transaction-based fee and rebate structure is operating effectively to further statutory goals and whether there is a need for any potential regulatory action in this area.” The Transaction Fee Pilot will apply to all stock exchanges. The final rule will become effective 60 days after its publication in the Federal Register.
SEC Adopts Final Rules Regarding Regulation A
On 19 December, the SEC adopted final rules that allow reporting companies to rely on the Regulation A exemption from registration for their securities offerings. SEC Chairman Clayton said, “Regulation A provides an exemption from registration under the Securities Act for offerings of securities up to $50 million in a 12-month period. The amended rules will provide reporting companies additional flexibility when raising capital.” The amendments to Regulation A, which were mandated by the EGRRCPA, will become effective upon publication in the Federal Register.
OCIE Announces 2019 Examination Priorities
On 20 December, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released its 2019 Examination Priorities. In the report, OCIE listed six “themes” for its 2019 Examination Priorities: (i) “[m]atters of importance to retail investors, including seniors and those saving for retirement”; (ii) “[c]ompliance and risk in registrants responsible for critical market infrastructure”; (iii) “[s]elect areas and programs of FINRA [Financial Industry Regulatory Authority] and MSRB [Municipal Securities Rulemaking Board]”; (iv) “Digital Assets”; (v) “[c]ybersecurity”; and (vi) “Anti-Money Laundering.” The OCIE said that while “the priorities drive many of OCIE’s examinations, the scope of any examination is determined through a risk-based approach that includes analysis of the registrant’s operations, products offered, and other factors.”
OIA Releases Report on Its 2018 Activities
On 20 December, the SEC’s Office of the Investor Advocate (“OIA”) released its Report on Activities: Fiscal Year 2018, which identifies “problematic products or practices” and summarizes steps the SEC and self-regulatory organizations took to respond to investor concerns during 2018. The “potentially problematic products or practices” reported by the SEC, the North American Securities Administration Association, FINRA, and the Municipal Securities Rulemaking Board and identified in the report include, among other things: (i) initial coin offerings, cryptocurrency, and blockchain; (ii) scams and schemes relating to impersonation of a “regulator.” natural disasters, paid-to-click scams, investments in “unicorns,” microcap stocks, and marijuana; (iii) cybersecurity; (iv) investment fees and expenses; (v) suitability of wrap fee programs; (vi) registrations of third-party providers, marketers, and gatekeepers; and (vii) other practices such as pennying and prearranged trading in connection with primary offerings. In the report, OIE also focused on five key policy areas: (i) public company disclosure; (ii) equity market structure; (iii) municipal market reform; (iv) accounting and auditing; and (v) fiduciary duty.
Advocate for Small Business Capital Formation
On 21 December, the SEC announced that Martha Legg Miller has been named as the first Advocate for Small Business Capital Formation. Ms. Miller will lead Office of the Advocate for Small Business Capital Formation, which was created pursuant to the SEC Small Business Advocate Act of 2016. In this role, Ms. Miller “will oversee the office dedicated to continuing to advance the interests of small businesses and their investors at the SEC and in our capital markets.”
CFTC & Derivatives
CFTC Staff Acts to Expand US Customer Options for Clearing Swaps
On 20 December, the CFTC staff issued permission to Eurex Clearing AG (“Eurex”) to begin clearing swap transactions on behalf of customers of futures commission merchants (“FCMs”), thereby providing U.S. customers with another option for clearing their swap transactions. The CFTC staff permission was issued in the form of three letters from the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight:
· The first letter, issued by the Division of Clearing and Risk, (i) confirmed that Eurex has demonstrated compliance with straight-through-processing requirements of Regulation 39.12(b)(7) and (ii) approved certain Eurex rules.
· The second letter, issued by both of the Divisions, provided conditional relief from certain CFTC regulations to allow Eurex FCM clearing members to deposit and hold customer margin in the form of securities.
· The third letter, issued by the Division of Clearing and Risk, provided no-action relief permitting modifications to the acknowledgment letter that Eurex is required to obtain from the Deutsche Bundesbank in order to deposit customer margin in the form of cash at the Deutsche Bundesbank.
In a statement, CFTC Chairman Christopher Giancarlo said that he is “pleased that the CFTC staff has accommodated a request from Eurex Clearing AG, a derivatives clearing organization registered with the CFTC, for relief in connection with clearing swap transactions on behalf of U.S. customers.”
Treasury Releases International Capital Data for October
On 17 December, the Treasury released its Treasury International Capital (“TIC”) data for October 2018. The data found that in October the sum total of all net foreign acquisition of long-term securities, short-term U.S. securities, and banking flows was a net TIC inflow of $42.0 billion. Of this, net foreign private inflows were $84.1 billion, and net foreign official outflows were $42.1 billion. The data also found that U.S. residents decreased their holdings of long-term foreign securities, with net sales of $37.8 billion, while foreign residents increased their holdings of U.S. Treasury bills by $8.3 billion.
Federal Reserve Holds FOMC Meeting
On 18-19 December, the Fed held its final Federal Open Markets Committee (“FOMC”) meeting of 2018. In the press release accompanying the meeting, the FOMC said, “Information received since the [FOMC] met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.” As a result, the FOMC decided “to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent.” Additionally, the FOMC released the summary material of economic projections made by the FOMC participants for the meeting.
FDIC and OCC Propose Rule Revising Company-Run Stress Testing Requirements
On 18 December, the FDIC and OCC issued notices of proposed rulemaking that would revise the agencies’ requirements for stress testing by supervised institutions, consistent with changes made by [the] Economic Growth, Regulatory Relief, and Consumer Protections Act.” The proposed rules would: (i) “amend the existing stress testing regulations to change the minimum threshold for applicability from $10 billion to $250 billion”; (ii) “revise the frequency of required stress tests by supervised institutions from annual to periodic”; and (iii) “reduce the number of required stress testing scenarios from three to two.” Comments on the proposed rule are due by 19 February 2019.
FDIC Issues Final Rule on Reciprocal Deposits and Seeks Public Comment on Brokered Deposits and Interest Rate Restrictions
On 19 December the FDIC adopted a final rule regarding the treatment of reciprocal deposits, and it issued an advanced notice of proposed rulemaking regarding brokered deposit and interest rate restrictions. The final rule will (i) implement Section 202 of the EGRRCPA “to exempt reciprocal deposits from being considered as brokered deposits for certain insured institutions” and (ii) make “conforming amendments to the FDIC’s regulations governing deposits insurance assessments.” The advanced notice of proposed rulemaking seeks comments on “all aspects of the brokered deposit and interest rate regulations.” The final rule will take effect 30 days after its publication in the Federal Register and comments on the advanced notice of proposed rulemaking are due 90 days after its publication in the Federal Register.
Agencies Propose to Update Management Interlock Rules
On 20 December, the Fed, FDIC, and OCC issued a request for public comment on “a proposal to update rules restricting the ability of a director or other management official to serve at more than one depository institution or depository holding company.” The proposed changes are intended to “provide relief for community banks and better align with other rules.” Currently, the management interlock rules prohibit a director or other management officials working at a depository organization with more than $2.5 billion in total assets from serving at the same time at an unaffiliated depository organization with more than $1.5 billion in total assets. The proposal seeks comment on “raising both thresholds to $10 billion in total assets, given the consolidation and growth in the industry over the past 20 years.” Comments on the proposed rule are due 60 days after its publication in the Federal Register.
Agencies Release Annual CRA Asset-Size Threshold Adjustments for Small and Intermediate Small Institutions
On 20 December, the Fed, FDIC, and OCC announced the annual adjustment to the asset-size thresholds used to define “small bank,” “small savings association,” “intermediate small bank,’ and “intermediate small savings association” under the Community Reinvestment Act (“CRA”) regulations. Annual adjustments to these asset-sized thresholds are based on the change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”) for each 12-month period ending in November. For the period ending in November 2018, the CPI-W increased by 2.59 percent, and as a result the definitions of “small” and “intermediate small” institutions for CRA examination purposes will change as follows: (i) “‘[s]mall bank’ or ‘small savings association’ means an institution that, as of December 31 of either of the prior two calendar years, had assets of less than $1.284 billion,” and (ii) “‘[i]ntermediate small bank’ or ‘intermediate small savings association’ means a small institution with assets of at least $321 million as of December 31 of both of the prior two calendar years and less than $1.284 billion as of December 31 of either of the prior two calendar years.”
Fed Releases Payments Study Supplement
On 20 December, the Fed released its The Federal Reserve Payments Study: 2018 Annual Supplement, which “updates data on core noncash payment types and systems that support everyday payments by U.S. consumers and businesses.” According to the supplement, “the sum of credit card, non-prepaid debit card, and prepaid debit card payments increased 11.3 billion from 112.2 billion to 123.5 billion payments by number and increased $500 billion from $6 trillion to $6.5 trillion by value from 2016 to 2017.” Key findings from the study include: (i) “[c]ard payments continued to show robust growth from 2016 to 2017”; (ii) “[r]emote general-purpose card payments increased by 22.8 percent by number from 2016 to 2017, compared with in-person payments, which grew just 7.2 percent”; (iii) “[n]etwork automated clearinghouse (ACH) payments grew faster, with network ACH payments increasing 5.7 percent by number and 6.9 percent by value from 2016 to 2017”; (iv) “[c]heck payments, based on a survey of the largest U.S. depository and financial institutions, showed a faster decline of 4.8 percent by number from 2016 to 2017 compared to a decline of 3.6 percent from 2015 to 2016”; and (v) “ATM withdrawals . . . have declined by number and increased by value in all study period from 2012 through 2017.”
Fed and FDIC Announce Resolution Plan Determinations and Finalize Resolution Plan Guidance
On 20 December, the Fed and FDIC announced that the resolution plans (commonly referred to as “living wills”) of four foreign-based banks “had weaknesses, but did not have ‘deficiencies,’ which are weaknesses sever enough to result in additional prudential requirements if not corrected.” The shortcomings in the plans of the four firms – Barclays, Credit Suisse, Deutsche Bank, and UBS – included “weaknesses in how each firm communicates and coordinates between its U.S. operations and its foreign parent in stress.”
The Fed and FDIC also announced that they had finalized resolution plan guidance that applies to the eight largest and most complex U.S. banking organizations. The final guidance “is largely similar to the proposal issued in June 2108, and provides additional information for the firms regarding their resolutions planning capabilities in areas such as capital, liquidity, and payment, clearing and settlement activities.”
Agencies Allow Three-Year Regulatory Capital Phase-in for New CECL Accounting Standard
On 21 December, the Fed, FDIC and OCC approved a final rule modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of the update to the accounting standard known as the Current Expected Credit Losses (“CECL”) methodology. The final rule will take effect on 1 April 2019. Banking organizations that choose to early adopt CECL may elect to adopt the rule as of the first quarter of 2019.
Agencies Issue Final Rules on Examination Cycles for Qualifying Small Banks
On 21 December, the Fed, FDIC, and OCC announced that they had issued final rules that “adopt without change the interim final rules issued in August that expanded the number of insured depository institutions and U.S. branches and agencies of foreign banks eligible for an 18-month on-site examination cycle, rather than a 12-month cycle.” The rules were authorized by the EGRRCPA and generally allow qualifying insured depository institutions with less than $3 billion in total assets to benefit from an extended 18-month on-site examination cycle. The final rules are effective 30 days after their publication in the Federal Register.
OCC Updates Comptroller Handbooks
On 28 December, the OCC updated three booklets of the Comptroller’s Handbook: “Bank Premises and Equipment,” “Consigned Items and Other Customer Services,” and “Litigation and Other Legal Matters.” The updated booklets: (i) “incorporate references to relevant OCC issuances published since these booklets were last issued”, (ii) “reflect the integration of federal savings associations into certain regulations”, (iii) “include certifying edits regarding supervisory guidance, sound risk management practices, legal language, or the roles of the bank’s board or management”, and (iv) “revise certain content for general clarity.”
Fed Chairman Powell Addresses Rates
On 4 January, as reported by the Wall Street Journal, Fed Chairman Jerome Powell, speaking before a conference in Atlanta, said the Fed, regarding its decisions on benchmark interest rates, “will be patient as we watch to see how the economy evolves.” According to the article, Powell said “markets have tumbled in recent weeks and aren’t expecting any Fed rate increases this year because investors are placing greater weight on risks to the outlook that haven’t yet shown up substantially in U.S. economic data.” Powell did not indicate when or whether the Fed planned to raise interest rates again. Regarding the speculation that President Trump’s unhappiness with the Fed’s monetary policy may lead to Powell’s remove as Fed Chairman, Powell said that he would not resign if Trump asked him to do so.
On 21 December, President Donald Trump named Comptroller of the Currency Joseph Otting to become the acting Director of the Federal Housing Finance Agency (“FHFA”) upon the expiration of FHFA Director Mel Watt’s term on 6 January. Comptroller Otting will continue his role as the Comptroller.