US Regulatory Research
FSOC Holds First Meeting of 2019 and Proposes Interpretive Guidance Amendments on Nonbank Financial Company Designations
On 6 March, Treasury Secretary Steven Mnuchin convened the first meeting of 2019 of the Financial Stability Oversight Council (“FSOC”) at the Department of the Treasury (“Treasury”). At the meeting, the Council “voted to approve proposed amendments to its interpretive guidance on nonbank financial company designations” relating to whether certain nonbank financial companies should be subject to supervision by the Federal Reserve (“Fed”). In a statement, the Treasury said that the guidance would “implement an activities-based approach to identifying and addressing potential risks to financial stability.” Further, the Treasury said that under the proposed interpretive guidance, the Council would: (i) “[p]rioritize its efforts to identify, assess, and address potential risks to U.S. financial stability through an activities-based approach”; (ii) “[p]erform a cost-benefit analysis before designating any nonbank financial company”; (iii) “[a]ssess the likelihood of a nonbank financial company’s material financial distress when evaluating the firm for a potential designation”; and (iv) “[c]reate a more efficient and effective nonbank financial company designation process” by condensing the current three-stage process into two stages, increasing transparency, and creating “off-ramps.” Comments on the proposed interpretive guidance are due 60 days after its publication in the Federal Register.
House Financial Services Committee Comments on FY2020 Budget
On 6 March, the U.S. House Committee on Financial Services (“House Financial Services Committee”) approved by a vote along party lines (33-24) a set of “Views and Estimates” regarding the FY2020 budget. The “Views and Estimates” document criticized, among other things, the tax legislation and actions of the CFPB under the Trump Administration.
SEC & Securities
SEC Commissioner Peirce Criticizes the Proxy Process and ESG
On 5 March, Securities and Exchange Commission (“SEC”) Commissioner Hester Peirce delivered remarks before the Council of Institutional Investors Spring Conference in a speech entitled “Festivus, Fortnite, and Focus.” Regarding the shareholder proposal process, Commissioner Peirce said that the current low ownership thresholds “encourage” shareholders to advance proposals that “promote a tiny group of shareholders’ personal political and social preferences,” which results in “considerable costs borne by all shareholders.” She said that the current system also allows shareholders “to submit losing proposals over and over again.” Peirce said that companies may resort to “negotiating backroom deals” with the proponents, but these deals “may not be in the best interest of the company and thus of the other shareholders who have not been part of the process.” Regarding corporate directors, Peirce expressed concern about making corporate directors’ personal characteristics an item of expected disclosure. She said such a requirement may have unintended consequences, such as forcing board members to disclose private information such as their “sexual orientation, religion, or ethnic background with the world . . . in order to allow the company to get ‘credit’ for having a diverse board.” Finally, Peirce addressed the recent statement by the International Organization of Securities Commissions on environmental, social, and governance (“ESG”) factors in investing, which the SEC did not sign. She said that the statement “directed issuers to consider whether ESG factors—which are not defined—should be included in their disclosures, endorsed the use of private disclosure frameworks purportedly designed to get at these factors, and suggested that some disclosures now being made voluntarily under these frameworks should be incorporated into these disclosures.” Peirce said that she found the statement to be “an objectionable attempt to focus issuers on a favored subset of matters, as defined by private creators of ESG metrics, rather than more generally on material matters,” and that “[r]equiring disclosures aimed at items identified by organizations that are not accountable to investors unproductively distracts issuers.”
SEC Chairman Clayton and TM Director Brett Redfearn Discuss Equity Market Structure for 2019
On 8 March, SEC Chairman Jay Clayton and SEC Division of Trading and Markets (“TM”) Director Brett Redfearn delivered joint remarks before Fordham University’s Gabelli School of Business in a speech entitled “Equity Market Structure 2019: Looking Back & Moving Forward.” Chairman Clayton and Director Redfearn first discussed the three equity market structure rulemakings adopted in 2018: (i) the transaction fee pilot; (ii) greater transparency of broker order routing practices; and (iii) operational transparency of alternative trading systems (“ATSs”) that trade national market system (“NMS”) stocks. Regarding the transaction fee pilot, Redfearn stated that the final rule was “the result of a great deal of analysis and deliberation” and that, as a result of the rulemaking process, the SEC “reduced the number of test buckets and overall size of the pilot while ensuring that we receive the information necessary to conduct a long overdue review and analysis of transaction fees.” Next, Clayton and Redfearn addressed the SEC’s equity market structure agenda for 2019. Chairman Clayton reiterated that one of the key responsibilities of the SEC is to ensure that “as technology changes, our regulations continue to drive efficiency, integrity, and resilience.” He said, “with that in mind, it is important that we reassess Regulation NMS, now 14 years old, as well as our understanding of best execution in today’s marketplace.” Clayton noted that TM hosted roundtables last year to address three topics: (i) thinly-traded securities; (ii) regulatory approaches to retail fraud; and (iii) market data and market access. Speaking on each topic, Clayton noted that the goal with thinly-traded securities is not to increase significantly the volume in these stocks but rather “to identify pragmatic steps that could make it easier for buyers and sellers to find each other and consummate trades in this segment of the market.” Redfearn added that the TM staff is “exploring whether to recommend that the Commission publish a policy statement” around issues on thinly-traded securities, including considering “whether exemptive relief from Regulation NMS is needed.” Regarding efforts to combat retail fraud, Clayton noted that he has asked TM staff to prepare a recommendation to the Commission to update Rule 15c2-11, which was designed to ensure that broker-dealers have sufficient information to provide quotes in securities that trade off-exchange. He also expressed concern about penny stocks and said that he has asked staff to review sales practice requirements in Rule 15g-9 and the definition of “penny stock” in Rule 3a51-1. Regarding market data and market access, Clayton said, “[i]t is clear that technology has shifted this regulatory landscape in fundamental ways since the adoption of Regulation NMS.” Clayton has asked the TM staff to develop recommendations to address consolidated market data distributed through the NMS plans, or “core data.” Redfearn stated that the SEC “must assess whether the current core data system is contributing to a bifurcated landscape of market data that calls into question whether access to markets remains fair and not unreasonably discriminatory.” Redfearn said that the TM staff intends to address several key areas related to core data: (i) speed of proprietary data feeds and Security Information Processor (“SIP”) data feeds; (ii) content and “odd lot” data; (iii) order protection and best execution; (iv) depth-of-book quotes; (v) SIP and NMS plan governance; (vi) transparency and disclosure requirements, including changes to the fee filing process; and (vii) fair and efficient access.
CFTC & Derivatives
CFTC Commissioner Stump Announces Data Protection Initiative
On 1 March, Commodity Futures Trading Commission (“CFTC”) Commissioner Dawn Stump announced the CFTC’s Data Protection Initiative at the Managed Fund Association’s MFA West 2019 Conference. Commissioner Stump said that her aim is to ensure that the CFTC: (i) “only collect[s] data required for our regulatory responsibilities”; (ii) “remove[s] duplicative reporting streams”; (iii) “explore[s] mechanisms for accessing sensitive information”; (iv) “enhance[s] internal controls for interacting with data”; (v) “examine[s] response procedures to cyber incidents”; and (vi) “update[s] data retention best practices.” Stump also said that, given the breadth of the CFTC’s oversight functions, “it is time for the CFTC to comprehensively evaluate our approach to data collection and implement consistent policies and procedures across the many functions required to carry out our mission.”
CFTC Director of Enforcement McDonald Announces Enforcement Advisory on CEA Violations Involving Foreign Corrupt Practices
On 6 March, the CFTC Director of Enforcement James McDonald, in remarks before the American Bar Association’s National Institute on White Collar Crime, announced that the CFTC had issued an Enforcement Advisory on self-reporting and cooperation for violations of the Commodity Exchange Act (“CEA”) involving foreign corrupt practices. Director McDonald acknowledged that CFTC enforcement of CEA provisions that encompass foreign corrupt practices includes misconduct that “might also violate the Foreign Corrupt Practices Act, and thus might be subject to prosecution under that statute by our partners at DOJ or the SEC.” McDonald said that the CFTC will work closely with other enforcement authorities “to avoid duplicative investigative steps.” McDonald also described the new Enforcement Advisory, stating that if a company or individual that is not registered with the CFTC reports a violation, cooperates with the CFTC, and appropriately remediates the issue, then the CFTC Enforcement Division will not, absent ”aggravating circumstances,” recommend a civil monetary penalty. “Aggravating circumstances” include, “among other things, whether: executive or senior level management of the company was involved; the misconduct was pervasive within the company; or the company or individual has previously engaged in similar misconduct.” McDonald said that even though CFTC registrants have existing obligations to disclose CEA violations, and are not eligible for the presumptive recommendation of no monetary penalty, CFTC registrants who “self-report, cooperate, and remediate still would be eligible to receive the recommended substantial reduction in penalty generally applicable under the Division’s existing Enforcement Advisories.”
CFTC Chairman Giancarlo Speaks on Evolving Markets and Innovation
On 6 March, CFTC Chairman Christopher Giancarlo delivered remarks before the 4th Annual DC Blockchain Summit in a speech entitled “The Digital Trinity: Technology, Markets, and Policy.” The speech highlighted the ways the CFTC is crafting a “modern regulatory approach” to rapidly changing markets and technological developments, including blockchain and cryptocurrencies. Chairman Giancarlo identified several characteristics of the current period of innovation: (i) "exponential technological change," (ii) the "disintermediation of traditional actors or business models," and (iii) the need for businesses and regulators to be technologically literate. Giancarlo said that the CFTC is responding to technological developments by: (i) adopting an “exponential growth mindset” that anticipates “the rapid pace of change, market adoption of innovation, the resulting new demands on regulators, and the need for capability and capacity-building at the regulator”; (ii) establishing LabCFTC to “address the opportunities, challenges, and risks posed by innovation”; (iii) becoming a “Quantitative Regulator, which means an effective and up-to-date big data organization capable of engaging in robust data collection, automated data analytics, and artificial intelligence deployment”; and (iv) embracing “market-based solutions” to determine the value of technological innovations. In closing, Giancarlo stated that while the CFTC regulations “were designed for environments that have been transformed, the principles underlying our regulations remain relevant – and remain enforceable.”
On 5 March, the CFTC cancelled its 7 March open meeting during which it was to consider, among other things: (i) comparability determinations and amendments for Japan and Australia; (ii) the National Futures Association (“NFA”) proposal to amend NFA compliance rules and interpretive notices to incorporate swaps; and (iii) a final rule amending regulations on segregation of assets held as collateral in uncleared swap transactions. The matters under consideration are being resolved through the CFTC’s seriatim process.
Fed Votes to Affirm the CCyB at Its Current Level
On 6 March, the Fed announced that it had voted to affirm the Countercyclical Capital Buffer (“CCyB”) at the current level of 0 percent. The CCyB is “a macroprudential tool that can be used to increase the resilience of the financial system by raising capital requirements on internationally active banking organizations when there is an elevated risk of above-normal future losses and when the banking organizations for which capital requirements would be raised by the buffer are exposed to or are contributing to this elevated risk—either directly or indirectly.”
Fed Issues Its February 2019 Beige Book
On 6 March, the Fed released its February 2019 Beige Book, which is a summary of commentary on current U.S. economic conditions. According to the document, economic activity continued to expand in late January and February, with ten Fed Districts reporting “slight-to-moderate growth.” Most Fed Districts also reported increased employment, with “modest-to-moderate” gains in a majority of Districts and “steady to slightly higher employment” in the others. The document also stated that prices continued to increase at a “modest-to-moderate pace.” The next Beige Book will be published on 17 April.
Fed Announces It Will Limit the Use of the “Qualitative Objection” In Its 2019 CCAR Exercise
On 6 March, the Fed announced that it will limit the use of the “qualitative objection” in its Comprehensive Capital Analysis and Review (“CCAR”) exercise for the 2019 cycle. The CCAR is an evaluation of the “capital adequacy” of the largest U.S. bank holding companies and the U.S. intermediate holding companies of foreign banking organizations. The Fed’s changes “eliminate the qualitative objection for most firms due to improvements in capital planning made by the largest firms.” The Fed noted that while the qualitative objection will no longer apply to certain firms, “all firms will continue to be subject to a rigorous evaluation of their capital planning processes as part of CCAR.” With the exception of firms that have received a qualitative objection in the immediately preceding year, the Fed will not issue a qualitative objection to any firm, beginning on 1 January 2021. The Fed also released instructions for this year’s CCAR exercise, stating that “18 firms will be subject to this year’s CCAR exercise, with five of those firms subject to a possible qualitative objection.”
Fed Governor Brainard Discusses Monetary Policy
On 7 March, Fed Governor Lael Brainard delivered remarks before the Julis-Rabinowitz Center for Public Policy and Finance and the Bendheim Center for Finance in a speech entitled “Navigating Cautiously.” Regarding a potential federal funds rate increase, Governor Brainard said that she sees the “appropriate posture as watchful waiting.” She also pointed to foreign risk factors, stating, “[w]hile strong foreign growth provided tailwinds early last year, foreign growth projections have been revised down repeatedly more recently. The slowdown of foreign growth now appears to be more persistent than initially assumed, with growth likely running below potential for most of last year.” Regarding the Fed’s balance sheet, Brainard said she expects the balance sheet reduction to come to a close by the end of 2019.
CFPB Issues ANPR on PACE Financing
On 4 March, the CFPB issued an ANPR on residential Property Assessed Clean Energy (“PACE”) financing, in accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). “PACE financing” is defined as “financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer.” The ANPR is intended to give the CFPB a better understanding of the PACE financing market. The CFPB said it is looking to adopt new rules under the EGRRCPA that will: (i) “carry out the purposes” of the Truth in Lending Act (“TILA”) ability-to-repay (“ATR”) requirements related to PACE financing, and (ii) apply the TILA’s “civil liability provisions for violations of the ATR requirements the CFPB will prescribe for PACE financing.” Comments on the ANPR are due 60 days after its publication in the Federal Register.
· March 11: Comments due on Fed, OCC, SEC, and CFTC’s proposed rule regarding proprietary trading and interests in hedge funds and private equity funds.
· March 11: SEC Commissioner Peirce will participate in a fireside chat with Richard Chambers, President and CEO of the Institute of Internal Auditors (“IIA”), at the IIA’s 2019 General Audit Management Conference.
· March 12: House Financial Services Committee will hold a hearing entitled “Holding Megabanks Accountable: an Examination of Wells Fargo’s Pattern of Consumer Abuses.”
· March 12: Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) will hold a hearing entitled “The Consumer Financial Protection Bureau’s Semi-Annual Report to Congress.”
· March 12: The CFTC’s Office of International Affairs will host its Annual International Regulators Meeting.
· March 12: House Appropriations Committee’s Subcommittee on Financial Services and General Government will hold a hearing entitled “Treasury’s Role in Combatting Financial Crimes.”
· March 12: CFTC Commissioner Berkovitz will participate in a panel discussion at CERAWeek 2019.
· March 13: House Financial Services Committee’s Subcommittee on National Security, International Development and Monetary Policy will hold a hearing entitled “Promoting Corporate Transparency: Examining Legislative Proposals to Detect and Deter Financial Crime.”
· March 13: House Financial Services Committee will hold a hearing entitled “Preparing for the Storm: Reauthorization of the National Flood Insurance Program.”
· March 13: House Financial Services Committee will hold a hearing entitled “Promoting Corporate Transparency: Examining Legislative Proposals to Detect and Deter Financial Crime.”
· March 13-14: At the FIA BOCA 2019 conference, CFTC Chairman Giancarlo will deliver the keynote speech and CFTC Commissioners Stump, Berkovitz, Behnam, and Quintenz will participate in panel discussions.
· March 14: House Financial Services Committee will hold a hearing entitled “Putting Investors First? Examining the SEC’s Best Interest Rule.”
· March 14: Senate Banking Committee will hold a hearing entitled “Financial Stability Oversight Council Nonbank Designations.”
· March 14: The House Ways and Means Committee will hold a hearing on President Trump’s FY2020 Budget. Treasury Secretary Mnuchin is scheduled to testify at the hearing.
· March 14: Comments due on OCC’s proposed rule on amendments to the stress testing rules for national banks and federal savings associations.
· March 15: Comments due on the SEC’s proposed rule on updated disclosure requirements and summary prospectus for variable annuity and variable life insurance contracts.
· March 15: Comments due on the CFTC’s (i) proposed rules regarding (a) post-trade name give-up on swap execution facilities and (b) swap execution facilities and trade execution requirement; and (ii) request for public comment on a rule amendment certification filing by ICE Futures U.S.