US Regulatory Research
wenty Senators Send Letter to Financial Regulators Seeking Better Oversight of Climate Risks
On 25 January, Senator Brian Schatz (D-HI) and nineteen other Democratic Senators sent letters to Federal Reserve (“Fed”) Chairman Jerome Powell, Comptroller of the Currency Joseph Otting, and Federal Deposit Insurance Corporation (“FDIC”) Chairman Jelena McWilliams to urge the regulators “to ensure our financial system is prepared for the risks associated with climate change.” The Senators said that the financial regulators “must join their international peers in ensuring the financial system is resilient to climate-related risks.” Further, the Senators said that they “have seen no evidence that [the Fed, Office of the Comptroller of the Currency (“OCC”), and FDIC] have seriously considered the financial risks of climate change or incorporated those risks into [their] supervision of financial institutions.” The Senators seek to “understand the preparedness of our nation’s financial system for climate change” and requested the agencies answer various questions, including: (i) whether each agency has “assessed the physical and transition risk that U.S. financial institutions face as a result of climate change”; (ii) whether each agency has “assessed if the U.S. financial system is resilient to such [systemic] risks, or taken any actions to increase the resiliency of the financial system to climate change”; and (iii) whether each agency has “collaborated with banking regulators, bank supervisory agencies, or central banks in other countries to discuss best practices related to assessing and managing climate change risk.”
House Passes Three Bipartisan Bills
On 28 January, the U.S. House of Representatives passed:
· the Promoting Transparent Standards for Corporate Insiders Act, which would require the Securities and Exchange Commission (“SEC”) to study and report on possible revisions to regulation regarding Rule 10b5-1 trading plans, which allow certain employees of publicly traded corporations to sell their shares without violating insider trading prohibitions;
· the FIND Trafficking Act, which would direct the Government Accountability Office to study how virtual currencies are linked to the supply chain for drugs and human trafficking and would give lawmakers insights into how to sever that link; and
· the Financial Technology Protection Act, which would establish an Independent Financial Technology Task Force to combat the use of financial technologies to fund terrorism.
Senate Banking Committee Chairman Crapo Outlines Agenda for 116th Congress
On 29 January, U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) Chairman Mike Crapo (R-ID) outlined the committee’s agenda for the 116th Congress. According to the agenda, the Senate Banking Committee will, among other things:
· assess housing finance reforms to (i) “fix the flawed system”; (ii) “establish appropriate levels of taxpayer protection”; (iii) “preserve the 30-year fixed rate mortgage”; (iv) “increase competition among mortgage guarantors”; and (v) “promote access to affordable housing”;
· “encourage capital formation, reduce burdens for smaller businesses and improve corporate governance”;
· “ensure the regulatory landscape welcomes” FinTech innovation;
· provide “consumers more control over and enhanced protection of consumer financial data,” and “ensure consumers are notified of breaches in a timely manner”;
· confront “predatory Chinese acquisitions of U.S. technology and intellectual property”; and
· help financial companies deliver credit to local communities.
Senator Brown Sends Letter to Fed Regarding Capital Buffers of Large Banks
On 30 January, Senate Banking Committee Ranking Member Sherrod Brown (D-OH) sent a letter to the Fed regarding capital buffers of large banks. In the letter, Brown states that the Basel III Countercyclical Capital Buffer (“CCyB”) mechanism implemented by the Fed “is designed precisely to require banks to increase capital during economic expansions so they are better positioned to provide credit and liquidity during economic contractions.” Brown urged the Fed to use the CCyB to increase the capital buffers at large banks at this time because “[a]t a time when the largest banks in the U.S. are reporting record profits – more than $100 billion in annual profits – now is precisely the time to require additional capital buffers that large banks could draw upon to mitigate a large adverse financial shock.”
Senate Banking Committee Chairman Crapo Releases Outline for Housing Finance Reform
On 1 February, Senate Banking Committee Chairman Crapo released an outline for housing finance reform legislation. Chairman Crapo’s outline calls for a “permanent, sustainable new housing finance system” that (i) “[r]educes the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors”; (ii) “[p]reserves existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital”; (iii) “[e]stablishes several new layers of protection between mortgage credit risk and taxpayers”; (iv) “[e]nsures a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards”; and (v) “[p]romotes broad accessibility to mortgage credit, including underserved markets.”
House Way & Means Committee Holds Hearing on Retirement Security
On 6 February, the U.S. House of Representatives Committee on Ways and Means held a hearing entitled “Improving Retirement Security for American’s Workers.” Testifying at the hearing were: Diane Oakley, Executive Director of the National Institute on Retirement Security; Nancy Altman, President of Social Security Works; Cynthia McDaniel, Co-director of the Missouri-Kansas City Committee to Protect Pensions; Roger Crandall, Chairman, President, and CEO of MassMutual; Luke Huffstutter, Owner of Annastasia Salon and Summit Salon Academy; Robin Diamonte, Corporate Vice President of Pension Investments at United Technologies Corporation; and Andrew Biggs, Resident Scholar at the American Enterprise Institute. Several members asked the panel what solutions exist for small businesses for workplace retirement plans and auto-enrollment issues. Mr. Huffstutter said that in his state, a program called “Oregon Saves,” a state and private sector retirement partnership, is a “great example” of how to spur small businesses to start offering retirement plans. Mr. Crandall said that auto-enrollment improves participation in retirement plans overall. Also, several members asked about the Retirement Enhancement and Savings Act (“RESA”) and open multiple employer plans (“Open MEPs”) and how they can help reinforce Social Security. Mr. Crandall said that RESA would help workers at small businesses or in the “gig economy” (i) gain access to a retirement plan, (ii) pool together to benefit from the economies of scale, and (iii) reduce administrative costs. Mr. Biggs agreed and added that MEPs spread the cost of administering retirement plans among employers.
Senate Special Committee on Aging Holds a Hearing on Financial Security in Retirement
On 6 February, the U.S. Senate Special Committee on Aging held a hearing entitled “Financial Security in Retirement: Innovations and Best Practices to Promote Savings.” Testifying at the hearing were: Gene Dodaro, Comptroller General of the United States and head of the Government Accountability Office; John Scott, Retirement Savings Project Director at PEW Charitable Trusts; Denis St. Peter, President and CEO of CES, Inc.; and Linda Stone, Fellow Volunteer at the Women’s Institute for Secure Retirement. Committee Chairman Susan Collins (R-ME) asked the panel how small businesses can be encouraged to offer plans for their employees. Mr. Scott pointed to the following examples of impediments to small businesses starting a plan: high start-up costs, lack of “internal administrative bandwidth,” lack of awareness of available options, and lack of awareness of existing tax credits and benefits. Mr. Peter said incentives, education, and outreach are a way to prompt small businesses to offer plans and that Open MEPs would be a “positive step forward.” Senator Mike Braun (R-IN) asked if pooling company plans is helpful to encouraging small businesses. Mr. Scott said that small businesses are interested in taking a pooled approach and that he hopes the Department of Labor issues guidance on this issue.
On 30 January, the Financial Services Committee held a meeting to adopt committee rules and appoint Majority and Minority members to their positions on the subcommittees for the 116th Congress.
SEC & Securities
SEC Makes Certain Exemptions Associated with Security-Based Swaps Activities Permanent
On 25 January, the SEC extended and granted on a permanent basis certain exemptions from Exchange Act requirements for security-based swaps activities; the exemptions were initially granted in 2011. The SEC also ordered, on a permanent basis, that: (i) security-based swaps transactions between eligible contract participants are exempt from the definition of “penny stock” set forth in Exchange Act Section 3(a)(51) and Rule 3a51-1 and (ii) security-based swaps are exempt from the definition of “municipal securities” in Exchange Act Section 3a(29).
SEC Divisions Announce Recommencement of Operations
On 27 January, SEC divisions and offices announced their transition plans regarding the recommencement of normal operations. The Division of Trading and Markets said it plans to address any pending filings, submissions, and requests for staff action based on when the items were submitted to the SEC. The Office of Compliance Inspections and Examinations (“OCIE”) said that it expects to resume examinations, “including those that were in-progress prior to, as well as those that were postponed during, the lapse in appropriations.” OCIE said that its staff members will be reaching out to registrants to reschedule postponed examinations and finish in-progress examinations in the coming weeks. The Division of Investment Management said that it expects to address filings and exemptive and guidance requests based on the order in which the items were amended or initially filed with the SEC. Similarly, the Division of Corporate Finance said that it anticipates addressing filings, submissions, and requests for staff action based on when an item was submitted.
FINRA Proposes Extension to the Expiration Date for Application of Rules to Security-Based Swaps
On 29 January, the Financial Industry Regulatory Authority (“FINRA”) proposed extending the expiration date of FINRA Rule 0180, “Application of Rules to Security-Based Swaps,” to 12 February 2020. This rule temporarily limits, with certain exceptions, the application of FINRA rules to security-based swaps and maintains the status quo. The proposed extension was filed for immediate effectiveness. The exemption was previously set to expire on 12 February 2019.
Chairman Clayton and Commissioner Roisman Deliver Statements with the SEC’s IAC Regarding the Proxy Process
On 6 February, SEC Chairman Jay Clayton and Commissioner Elad Roisman spoke with the SEC’s Investor Advisory Committee (“IAC”) via telephone. Chairman Clayton said that he believes “our disclosure rules and guidance, and our issuers should focus on the material information that a reasonable investor needs to make informed investment and voting decisions.” In discussing human capital disclosures, Clayton said he thinks that “investors would be better served by understanding the lens through which each company looks at their human capital. [For example,] [d]oes management focus on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors?” Next, Clayton reiterated that he thinks that the current system “needs a major overhaul” and that he is “interested in suggestions for what such an overhaul would entail. Finally, Chairman Clayton announced that he had asked Commissioner Roisman to take the lead on efforts to consider improvements to the proxy process and that Roisman had agreed to do so.
In his brief remarks, Commissioner Roisman echoed Chairman Clayton’s comments and contended that the current proxy voting system is “inefficient, opaque, and unreliable in its accuracy” and needs fixing. Both Clayton and Roisman encouraged that comments or suggestions be submitted to the comment file from the November 2018 proxy roundtable.
SEC Clarifies CD&I on Diversity
On 6 February, the SEC updated its Compliance and Disclosure Interpretations (“CD&I”) of Regulation S-K to clarify disclosure of “self-identified diversity characteristics” required under Item 401 (directors, executive officers, promoters, and control person) and under Item 407 (“Corporate Governance”) with respect to nominees. Under Question 116.11, the SEC said to the extent that a board or nominating committee considers the “self-identified diversity characteristics” of an individual who consented to the disclosure of those characteristics, the staff would expect a company’s discussion under Item 401 to include “identifying those characteristics and how they were considered.” Under Question 133.13, the SEC staff said it expects “any description of diversity polices” under Item 407 to also include a discussion of (i) how a company considers the self-identified diversity characteristics of nominees and (ii) any other qualifications a diversity policy takes into consideration.
Commissioner Peirce Speaks Regulation at the SEC
On 8 February, SEC Commissioner Hester Peirce delivered remarks before the University of Missouri School of Law entitled “Regulation: A View from Inside the Machine.” In her speech, Peirce said that in the financial industry, entrepreneurship and innovation “do not always face such a warm reception” from regulators. She acknowledged that every innovation “carries with it some risk,” but she argued that regulators “must allow innovation to proceed” because often the benefits of innovation greatly outweigh their risks. Peirce said that regulators should not only think about protecting the public, but also about “ensuring that the capital markets are able to serve the rest of the economy without undue barriers.” As an example of the SEC’s efforts, Peirce noted the SEC’s recent hire of its first Advocate for Small Business Capital Formation, Martha Miller. Peirce sees Miller’s role as one that will bring “a much needed voice to the agency that has not been particularly open to thinking about the benefits that come from eliminating regulatory barriers to small issuers seeking capital.” Regarding blockchain and cryptocurrencies, Peirce sees this developing area as an opportunity for the SEC to “rethink its approach to innovation” and to allow “innovation on this new frontier to proceed without compromising the objectives of our securities laws.” However, Peirce said that she is “concerned that [the SEC’s] approach concerning such products borders on merit-based regulation, which means that we are substituting our own judgment for that of potential investors in these products.” She explained that “[w]e rightfully fault investors for jumping blindly at anything labeled crypto, but at times we seem to be equally impulsive in running away from anything labeled crypto. We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences.” Finally, Peirce encouraged innovators to talk with the SEC and said that she is “asking for help on getting the regulations right so that innovators and entrepreneurs can spend their time and attention on making better products, providing better services, and revolutionizing the way we interact with one another.”
On 4 February, the SEC announced that Elizabeth McFadden has been named Deputy General Counsel for General Law and Management at the agency.
CFTC & Derivatives
CFTC Commissioner Berkovitz Speaks on the Swaps Market
On 27 January, Commodity Futures Trading Commission (“CFTC”) Commissioner Dan Berkovitz delivered remarks before the Commodity Markets Council State of the Industry 2019 in a speech entitled “Competition, Concentration, and Cartels in the Swaps Market.” In his speech, Berkovitz noted that the current swaps market is dominated by “a few large banks,” with the five largest dealers party to “80% of the notional amount traded.” He said that "[t]hese high levels of concentration show that the largest dealers possess considerable market power . . . [and] also present potential systemic risks, since the failure of one of these firms in a highly interconnected market could have significant impacts on the other firms in the market." Berkovitz, however, pointed out that economic evidence exists showing that the CFTC’s current swap execution facility (“SEF”) rules have "led to more competition, greater liquidity, more electronic trading, better price transparency, and lower prices for swaps that are traded on regulated platforms." He offered several examples of improvements to the swaps market that could further increase competition, including: (i) expanding floor trader registration, (ii) revising bank capital requirements impacting futures commission merchants, (iii) abolishing the practice of name give-up for most cleared swaps, and (iv) enabling buy-side firms to obtain average pricing for buy-side swap trades.
CFTC Chairman Giancarlo Issues Statement on Resumption of Operations
On 28 January, CFTC Chairman Christopher Giancarlo announced the full resumption of CFTC operations following the partial government shutdown. Giancarlo said that “[i]n the days to come, we will update the public and market participants of the status of resumption of various agency activities, including publication of market data.”
CFTC Releases Schedule for Delayed Market Data Reports
On 29 January, the CFTC’s Market Intelligence Branch of the Division of Market Oversight announced an updated release schedule of CFTC market date reports that were delayed during the partial government shutdown.
CFTC Extends Comment Period for SEF Rule Proposal
On 5 February, the CFTC extended to 15 March the deadline for comments for (i) the proposed rules concerning SEFs and trade execution and (ii) the request for comments regarding the practice of “post-trade name give-up.”
FOMC Holds First Meeting of 2019
On 29-30 January, the Fed’s Federal Open Market Committee (“FOMC”) held its first meeting of 2019. At the meeting, the FOMC “decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.” In making its decision, the FOMC said it “continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.” As a result, the FOMC said that it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” Also at the meeting, the FOMC reaffirmed its “Statement on Longer-Run Goals and Monetary Policy Strategy,” which is a statement on longer-run goals that is intended to hold the Fed accountable and help the public understand how the FOMC interprets its statutory mandate to promote maximum employment and stable prices.
Fed Governor Brainerd Delivers Remarks on Community Reinvestment Act
On 1 February, Fed Governor Lael Brainerd delivered remarks at the “Research Symposium on the Community Reinvestment Act” hosted by the Federal Reserve Bank of Philadelphia in a speech entitled “Strengthening the Community Reinvestment Act: What Are We Learning?” In her speech, Brainerd touched on many topics relating to the Community Reinvestment Act (“CRA”), including (i) “the significant volume of CRA loans and investments that have supported LMI [low- and moderate income] households and communities”; (ii) “promising solutions to the challenge of modernizing the definition of assessment areas to keep up with changes in banks’ business models”; (iii) helpful input the Fed has received on “tailoring CRA regulations to banks of different sizes and business models”; (iv) suggestions the Fed has received for “about how to increase the consistency and predictability of CRA evaluations and ratings.”
Fed and OCC Release Scenarios and Reporting Instructions for 2019 CCAR and DFAST Exercises
On 5 February, the Fed released the scenarios banks and supervisors will use for the 2019 Comprehensive Capital Analysis and Review (“CCAR”) and Dodd-Frank Act stress test (“DFAST”) exercises. Each scenario includes twenty-eight variables, such as gross domestic product and unemployment rate, that cover domestic and international economic activity. The 2019 stress tests will apply the following three hypothetical scenarios:
· a “baseline scenario,” which is “a moderate economic expansion through the scenario period," with the unemployment rate increasing to up to 4 percent by the first half of 2021;
· an "adverse scenario," which is characterized by "weakening economic activity across all of the economies included in the scenario, accompanied by a moderate correction in asset prices and rise in volatility"; and
· a "severely adverse scenario," which contemplates a "severe global recession accompanied by a period of heightened stress in commercial real estate markets and corporate debt markets."
Additionally, the Fed said that firms with “substantial trading or custodial operations will be required to incorporate a counterparty default scenario component into their supervisory adverse and severely adverse stress scenarios for CCAR 2019.
Fed Announces Set of Changes Regarding Stress Testing For Large and Complex Banks
On 5 February, the Fed finalized a set of changes that “will increase the transparency of its stress testing program for the nation’s largest and most complex banks.” The Fed said the changes are “intended to improve public understanding of the program while maintaining its ability to independently test large banks resilience.” The changes include:
· Enhanced disclosure of the models used in the Fed’s supervisory stress tests conducted under Regulation YY. The final enhanced disclosures consist of three components: (i) "enhanced descriptions of supervisory models, including key variables," (ii) "modeled loss rates on loans grouped by important risk characteristics and summary statistics associated with the loans in each group,” and (iii) “portfolios of hypothetical loans and the estimated loss rates associated with the loans in each portfolio.”
· Amendments to the Fed’s policy statement regarding the scenario design framework for stress testing, which are intended to “enhance the counter-cyclicality and transparency” of the scenario design framework.
· A stress test policy statement “on the approach to supervisory stress testing conducted under the Board’s stress testing rules and the Board’s capital plan rule.” The statement explains, among other things, the Fed’s approach to model development, implementation, and validation.
Fed Vice Chairman Quarles Speaks on Stress Testing
On 6 February, Fed Vice Chairman for Supervision Randal Quarles delivered remarks before the Council for Economic Education in a speech entitled “Inviting Participation: The Public’s Role in Stress Testing’s Next Chapter.” In his remarks, Vice Chairman Quarles said, “Public institutions exist under a grant of trust from the people they serve, to pursue a specific policy goal. When the public holds an institution accountable for that grant, the institution becomes stronger.” He said that the Fed relies on public participation not only for accountability reasons, but also for the Fed’s “effectiveness, because the best ideas in finance and economics can, and often do, come from a wide variety of sources.” Quarles stated that the Fed is not and cannot be “a monopoly on insight or wisdom,” and that the Fed “recognizes these limits, and the need to invite new ideas, through a variety of initiatives.” Specifically, Quarles pointed to the Fed’s recent decision to suspend stress tests this year for “lower-risk firms” -- generally those with total assets between $100 billion and $250 billion-- as an example of the Fed’s being open to “changes and novel ideas” to ensure our supervisory framework “evolves from its post-crisis origins to an effective steady state.” In concluding, Quarles reiterated the Fed’s need to “not just allow input, but welcome it; not just permit debate, but foster it; not just allow participation, but treat it as essential to our work.”
On 28 January, the Fed announced that it will host a public research conference on its stress testing framework in July 2019.
On 5 February, the OCC appointed Grovetta Gardineer to the position of Senior Deputy Comptroller for Bank Supervision Policy. Gardineer will assume the position on 2 March 2019.
Other Financial Regulators
Treasury Announces Marketable Borrowing Estimates
On 28 January, the Department of the Treasury (“Treasury”) announced its current estimates of privately-held marketable borrowing for the January-March 2019 and April-June 2019 quarters. According to the release, the Treasury expects to borrow “$365 billion in privately held net marketable debt, [during the January-March 2019 quarter,] assuming an end-of-March cash balance of $320 billion.” That borrowing estimate is $8 billion higher than announced in October 2018. The Treasury expects to borrow “$83 billion in privately-held net marketable debt, [during the April-June 2019 quarter,] assuming an end-of-June cash balance of $300 billion.”
Acting FHFA Director Otting Sends Letter to Representative Water and Senator Brown Regarding Priorities
On 30 January, Acting Director of the Federal Housing Finance Agency (“FHFA”) Joseph Otting sent a letter to Representative Maxine Waters (D-CA) and Senator Sherrod Brown (D-OH) in response to a letter the lawmakers sent to Otting on 25 January 2019. The lawmakers’ letter requested information about the policies Otting “hope[s] to pursue at FHFA.” Otting stated in his reply letter that the FHFA’s “mission is to ensure that the regulated entities [Fannie Mae and Freddie Mac] operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.” Otting listed his many statutory duties, noted that those duties support the FHFA’s mission, and said that he “intend[s] to carry out these duties and responsibilities and lead the agency in accomplishing its mission.”
· Feb. 11: Comments due on CFPB’s proposed rule regarding policy on no-action letters and the “BCFP Product Sandbox.”
· Feb. 11: Comments due on FDIC’s request for information on the FDIC’s deposit insurance application process.
· Feb. 12: CFTC Commissioner Dawn Stump will participate in a panel discussion at the TABB Group’s Fixed Income 2019 Conference.
· Feb. 12: SEC Commissioner Hester Peirce will speak at the Bipartisan Policy Center’s “The Year Ahead for Capital Markets.”
· Feb. 12: The House Financial Services Committee will hold a hearing entitled “The Use of Sanctions and Economic Statecraft in Addressing U.S. National Security and Policy Challenges.”
· Feb. 13: The House Financial Services Committee will hold a hearing entitled “Homeless in America: Examining the Crisis and Solutions to End Homelessness.”
· Feb. 13: The House Financial Services Committee’s Consumer Protection and Financial Institutions Subcommittee will hold a hearing entitled “Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses.”
· Feb. 14: The Senate Banking Committee will hold a hearing to consider the nomination of Bimal Patel to be the Assistant Treasury Secretary for Financial Institutions.
· Feb. 14: SEC Commissioner Hester Peirce will participate in the Asset Management Derivatives Forum 2019. At 10 a.m. PT, she will take part in an interview with Futures Industry Association President and CEO Walter Lukken and CFTC Commissioner Brian Quintenz. At 2 p.m. PT, she will participate in a roundtable with CFTC Commissioner Brian Quintenz.
· Feb. 14: The House Financial Services Committee’s Subcommittee on Housing, Community Development, and Insurance will hold a hearing entitled “The Affordable Housing Crisis in Rural America: Assessing the Federal Response.”
· Feb. 15: Comments due on the SEC’s proposed updated disclosure requirements and summary prospectus for variable annuity and variable life insurance contracts.
· Feb. 15: Comments due on the CFTC’s request for feedback on crypto-asset mechanics and markets.
· Feb. 15: Comments due on the Fed, FDIC, and OCC’s proposed updates to the calculation of derivative contract exposure amounts.