US Regulatory Research
White House Releases FY2020 Budget
On 11 March, the White House released its FY2020 budget proposal, which, among other things, recommends (i) eliminating the Securities and Exchange Commission’s (“SEC”) Reserve Fund established under Dodd-Frank; (ii) restructuring the Consumer Financial Protection Bureau (“CFPB”); and (iii) subjecting the Financial Stability Oversight Council (“FSOC”) and the Office of Financial Research to the Congressional appropriations process and “continuing efforts to make FSOC decision-making procedures more transparent and to implement more rigorous cost-benefit analysis standards.” On 18 March, the Office of Management and Budget published the FY2020 budget proposal’s appendix and analytical perspectives, which contain detailed funding proposals for each agency.
House Appropriations Subcommittee Holds Hearing on Combatting Financial Crimes
On 12 March, the U.S. House Committee on Appropriations’ Subcommittee on Financial Services and General Government held a hearing entitled “Treasury’s Role in Combatting Financial Crimes.” The Department of the Treasury (“Treasury”) Undersecretary Sigal Mandelker testified at the hearing. In his opening remarks, Subcommittee Chairman Mike Quigley (D-IL) said that the Treasury plays a “vital role” in protecting the U.S.’s financial security, and he stressed the need to understand the tactics of terrorists and financial criminals seeking to harm the U.S.’s financial security through money laundering. Representative Sanford Bishop Jr. (D-GA) asked about the potential implications of companies, such as Facebook, creating virtual currencies that can be sent over social platforms such as Venmo. Mandelker said that the Treasury’s Office of Terrorism and Financial Intelligence is focused on this issue, and she pointed to the Financial Crimes Enforcement Network’s (“FinCEN”) 2014 guidance on this issue that said virtual currency transmitters are the same as other money transmitters and are subject to the same compliance requirements.
Senate Banking Committee Holds Hearing on CFPB
On 12 March, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) held a hearing entitled “Oversight: The Consumer Financial Protection Bureau’s Semi-Annual Report to Congress.” CFPB Director Kathleen Kraninger testified at the hearing. Senator Mike Crapo (R-ID) raised concerns about the amount of data collected by the government and noted that when the CFPB was created, it collected “far more data than was necessary.” However, he commended the CFPB for becoming more responsive to his concerns under new leadership. He asked Kraninger what steps the CFPB will take next on data collection and protection. Kraninger replied that it is her principle to only collect the data that is necessary. She also said the CFPB is currently looking into whether personally identifiable information is “actually needed.” Senator Richard Shelby (R-AL) asked Kraninger what she learned on her recent “listening tour” across the country, to which Kraninger said she saw the importance of strong educational tools for consumers and clear rules of the road for financial institutions.
Senate Agriculture Committee Holds Hearing on the Nomination of Heath Tarbert to the CFTC
On 13 March, the U.S. Senate Committee on Agriculture, Nutrition, and Forestry held a hearing regarding the nomination of Mr. Tarbert to be Chairman of the Commodity Futures Trading Commission (“CFTC”). Committee Chairman Pat Roberts (R-KS) discussed how the EU is pushing to regulate the financial markets in the U.S. and asked Mr. Tarbert what Congress can do to ensure that the CFTC is the exclusive regulator of U.S. derivatives markets. Tarbert said that he is watching the issue closely, and he stressed that clearinghouses and exchanges in the U.S. must be solely supervised and regulated by U.S. regulators. However, he said there is room for collaborative relationships with foreign regulators. Senator Sherrod Brown (D-OH) asked if Tarbert would commit to maintaining the current $8 billion de minimis threshold for the definition of “swap dealer,” and Tarbert replied that the CFTC made a “unanimous” decision to hold the de minimis threshold at $8 billion and that he will not reopen the issue if he is confirmed.
House Financial Services Subcommittee Holds Hearing on Financial Crimes
On 13 March, the U.S. House Financial Services Committee’s Subcommittee on National Security, International Development and Monetary Policy held a hearing entitled “Promoting Corporate Transparency: Examining Legislative Proposals to Detect and Deter Financial Crime.” Testifying at the hearing were: Jacob Cohen, former Director of FinCEN’s Office of Stakeholder Engagement; Dennis Lormel, President and CEO of DML Associates, LLC; Amit Sharma, CEO of FinClusive; and Gary Shiffman, Founder and CEO of Giant Oak, Inc. In his opening remarks, Subcommittee Chairman Emanuel Cleaver (D-MO) said that he would like to promote free and fair markets with policies that protect and deter financial crimes domestically and globally. Representatives Stephen Lynch (D-MA) and Brad Sherman (D-CA) asked the panel about the use and endorsement of blockchain and cryptocurrencies. Sharma said that all cryptocurrencies are not the same and cannot be treated equally. Sharma added that it is important to harness the technology around cryptocurrencies, but not to endorse any specific cryptocurrency. Several lawmakers asked the panel about making changes to beneficial ownership and combating shell companies. Lormel said that information collection is useful in combating shell companies, but he noted that law enforcement often does not have adequate resources to trace shell companies and thus hits dead ends. Representative Ed Perlmutter (D-CO) asked how regulation has led to financial exclusion. Sharma said that a combination of growing financial institution requirements and ongoing fines that increase over time have led to certain transactions and entities being perceived as compliance risks.
Senators Introduce Bi-partisan Bill to Help Victims of Investment Fraud
On 14 March, Senators John Kennedy (R-LA) and Mark Warner (D-VA), both members of the Senate Banking Committee, introduced the Securities Fraud Enforcement and Investor Compensation Act, which would give the SEC the ability to seek restitution for investors harmed by securities fraud for up to 10 years after the fact. The bill was introduced in response to the Supreme Court’s decision in Kokesh v. Securities Exchange Commission, which held that the SEC only has five years to bring disgorgement claims.
Senate Banking Committee Holds Hearing on FSOC Nonbank Designations
On 14 March, the Senate Banking Committee held a hearing entitled “Financial Stability Oversight Council Nonbank Designations.” Testifying at the hearing were: Douglas Holtz-Eakin, President of the American Action Forum; Paul Schott Stevens, President and CEO of the Investment Company Institute; and Jeremy Kress, Assistant Professor of Business Law at the University of Michigan’s Ross School of Business. In his opening remarks, Committee Chairman Mike Crapo (R-ID) discussed historical issues with FSOC’s designation process and recent administration efforts, including Treasury’s 2017 report and FSOC’s March 6 guidance, to move towards an activities-based designation framework and to require cost-benefit analyses, among other things, that Chairman Crapo said were a step in the right direction. Senators Mike Rounds (R-SD) and Doug Jones (D-AL) asked the panel whether their bipartisan bill, the Financial Stability Oversight Council Improvement Act, would make FSOC more efficient, or add additional costs or time to the process. Dr. Holtz-Eakin and Mr. Stevens supported the need for consultation with an entity’s primary regulator prior to designation, as required in the bill, and Mr. Stevens added that FSOC would remain in control of the timetable and would still have its emergency designation authority as granted in Dodd-Frank. Several Senators asked about the costs and role of nonbank systemically important financial institution (“SIFI”) designations. Holtz-Eakin cited compliance costs and costs of higher capital requirements, which are ultimately passed on to consumers. Mr. Stevens emphasized the costs of applying bank-like regulations to the fund industry. Professor Kress repeatedly expressed concerns with moving away from the current entity-based designation process to an activities-based approach, citing gaps and fragmentation in our current regulatory framework in areas like hedge funds and fintech where he argues in many cases “there is not an appropriate regulator who would have the authority to address systemic risks under their jurisdiction.”
House Financial Services Subcommittee Holds Hearing on SEC’s Reg BI
On 14 March, the U.S. House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets held a hearing entitled “Putting Investors First? Examining the SEC’s Best Interest Rule.” Testifying at the hearing were: Susan MacMichael John, Chair of the Certified Financial Planner (“CFP”) Board of Standards; Dina Isola, Investment Advisor Representative for Ritholtz Wealth Management; Barbara Roper, Director of Investor Protection, Consumer Federation of America; Lee Baker, President of AARP Georgia State; and Harvey Pitt, CEO of Kalorama Partners and former SEC Chairman. In her opening remarks, Subcommittee Chair Carolyn Maloney (D-NY) said that despite the SEC staff’s recommendation to create a uniform fiduciary duty, the SEC’s proposed Regulation Best Interest (“Reg BI”) falls short. Specifically, Maloney said, “Reg BI does not create a full fiduciary duty for brokers. Instead, brokers have to act in the ‘best interest of customers,’ which sounds good, but the rule does not even define what that means.” Representative Brad Sherman (D-CA) asked the panel if the proposed rule is better than no rule at all. Ms. Isola said that the proposed rule represents the “lowest common denominator” and that she would rather not answer the question because an answer would require her to make a “horrible choice.” Ms. John said that it would be better not to issue a rule because the proposed rule “undercuts” what existed before and she hopes for a better rule later. Ms. Roper agreed, stating that the proposed rule deprives investors of protections they had before. Mr. Pitt said the proposed rule represents an “enormous improvement” but that additional improvements are possible. Representative Steve Stivers (R-OH) asked whether, under the proposed rule, it would be possible for a broker to make a recommendation that is not in the best interest of a client, to which Mr. Pitt replied that it would not be possible. Mr. Stivers also asked Mr. Pitt how brokers will have to handle conflicts under the proposed rule. Mr. Pitt replied that “grammatical fraud,” where potential conflicts are obscured, will not be allowed and that the SEC has come up with a flexible approach to the issue.
SEC & Securities
SEC Announces Fee Rate Advisory #2 for FY2019
On 12 March, the SEC announced that the fee rates applicable to securities transactions will be $20.70 per million dollars. Each self-regulatory organization will continue to pay the SEC a rate of $13.00 per million for covered sales occurring on charge dates through 15 April. The new fee will go into effect on 16 April.
SEC Issues Investor Bulletin on Escheatment Process
On 12 March, the SEC’s Office of Investor Education and Advocacy issued an Investor Bulletin to provide basic information about the escheatment process for investment accounts. Escheatment is the process of “turning custody of abandoned assets or accounts over to a state authority.”
CFTC & Derivatives
CFTC and MAS Issue Joint Statement Regarding Certain Derivatives Trading Venues
On 13 March, the CFTC and the Monetary Authority of Singapore (“MAS”) announced the mutual recognition of certain derivatives trading venues in the U.S. and Singapore. The CFTC also issued an order “exempting certain derivatives trading facilities regulated by MAS from the requirement to register with the CFTC as swap execution facilities (SEFs).” Similarly, MAS announced the “issuance of regulations exempting certain derivatives trading venues regulated by the CFTC from the requirement to be a MAS-authorized approved exchange (AE) or recognised market operator (RMO) before establishing or operating an organised market.” CFTC Chairman Christopher Giancarlo said that the accord will “help avoid market fragmentation, protectionism, and regulatory arbitrage.” CFTC Commissioners Dan Berkovitz and Rostin Behnam concurred with the determination, and asked the CFTC staff “to monitor whether the implementation of this regulatory regime is in fact comparable in practice.”
CFTC Chairman Giancarlo Reviews Key Issues on Agency’s Agenda
On 13 March, CFTC Chairman Giancarlo delivered remarks before the 44th Annual International Futures Industry Conference in a speech entitled “Improving the Past, Tackling the Present, and Advancing to a Digital Market Future.” Giancarlo criticized the regulatory implementation of G-20 swaps market reforms. Specifically, Giancarlo: (i) repeated his concerns over the excessive amount of capital that bank regulators require financial institutions to take out of trading markets; (ii) reiterated his view that the current SEF framework is “too prescriptive, too burdensome and too modeled on futures markets"; and (iii) suggested his disappointment at the “unfinished” harmonization of international data standards. Giancarlo also stressed that the CFTC must continue to work with foreign regulatory counterparts, particularly in coordinating issues on Brexit and changes to the European Market Infrastructure Regulation (“EMIR”). Finally, looking ahead, Giancarlo said that the CFTC will (i) issue new proposals on position limits, (ii) consider permanent relief for insured depository institutions from requirements to count certain swaps toward the dealer de minimis threshold, and (iii) issue proposals on cross-border matters and the registration and regulation of swaps dealers.
CFTC and EC Issue Joint Statement on EMIR 2.2
On 13 March, CFTC Chairman Giancarlo and Vice President of the European Commission (“EC”) Valdia Dombrovskis issued a joint statement “on cross-border derivatives regulation on the occasion of a political agreement between European Union (EU) co-legislators on the EMIR 2.2 legislation.” The CFTC and the EC also voiced an ongoing commitment to ensuring that the implementation of G20 reforms is effective in achieving the goals of “increased financial stability, resilience and transparency in the global transatlantic OTC derivatives market.” Additionally, the CFTC and EC said they expect that the implementation of EMIR 2.2 and the CFTC’s review of its swap regulatory framework and cross-border approach will lead to “more deference between the CFTC and EU supervisions.” In a separate statement, Giancarlo noted that, “while EMIR 2.2 requires a number of implementation steps such that application of EMIR 2.2 to U.S. CCPs [central counterparties] will likely not take effect until 2021 or beyond, it is understood that during this time EU authorities . . . will work with the CFTC to address U.S. concerns” and that “it is understood that the starting point for any future recognition assessment of U.S. CCPs will be the EC’s current 2016 equivalence decision and the recognition decisions made as a product of the agreement between the CFTC and EC in 2016.”
FDIC Chair McWilliams Speaks on Volcker Rule Revisions
On 11 March, Federal Deposit Insurance Corporation (“FDIC”) Chair Jelena McWilliams delivered remarks before the Institute of International Bankers Annual Washington Conference. McWilliams said that there is “broad consensus” on the need to amend the Volcker Rule. According to McWilliams, a revised rule should “provide more certainty to regulated entities and improve how we define what types of trading are prohibited and what types of funds are within the scope of the rule so that both bankers and supervisors have clear rules of the road.” Further, she said that the rule should be “appropriately tailored” so that its requirements are proportional to the size and scope of an institution. Regarding foreign funds, McWilliams said that the current regulations are “overly complex, and frankly, impractical to implement.” She said that as a result, the FDIC “will consider the options available for funds in non-U.S. jurisdictions and the operational burdens under the existing rule’s requirements.” Also, McWilliams predicted that federal banking agencies will “propose two major interagency rulemakings very soon” that would: (i) “tailor the application of capital and liquidity requirements for foreign banks”; and (ii) “tailor the Dodd-Frank resolution planning requirements.” Finally, McWilliams said the FDIC “expects to issue an advanced notice of proposed rulemaking soon to revise the resolution planning requirements for insured depository institutions.”
Fed Governor Brainard Speaks on the CRA
On 12 March, Federal Reserve (“Fed”) Governor Lael Brainard delivered remarks before the 2019 Just Economy Conference in a speech entitled “The Community Reinvestment Act: How Can We Preserve What Works and Make it Better?” In her speech, Brainard emphasized the need to clarify the current definition for assessment areas in the Community Reinvestment Act (“CRA”). She said that the Fed is considering “rework[ing] the assessment area definition so that banks of a certain scale would have separate assessment areas for their retail activities and their community development activities.” She explained that as part of this approach, “a bank would get CRA consideration for community development activities in a more expansive area.” She said the current approach has proven “challenging in practice” because banks sometimes invest in community development activity only to find that their examiner does not agree that the activity is located within the particular bank’s assessment area. She concluded that “changes to the CRA regulations’ definition of assessment areas and performance test structure, along with improved metrics based on better data have the potential to enhance the regulations and better serve its purpose of encouraging banks to help meet the credit needs of low- and moderate-income communities.”
Fed and FDIC To Hold Meetings on the Proposed BB&T and SunTrust Merger
On 14 March, the Fed and the FDIC announced that they will hold two joint meetings on the proposed merger between BB&T Corporation and SunTrust Banks, Inc. The agencies said the meetings are intended “to collect information related to factors the Board and FDIC (agencies) are required to consider under the Bank Holding Company Act and the Bank Merger Act.” The first meeting is schedule to be held on 25 April in Charlotte, North Carolina, and the second meeting is scheduled to be held on 3 May in Atlanta, Georgia.
Agencies Issue Joint Release on Adoption of Interim Final Rules Regarding Legacy Swaps
On 15 March, the Fed, Farm Credit Administration, FDIC, Federal Housing Finance Agency, and Office of the Comptroller of the Currency (“OCC”) announced they had adopted an interim final rule to facilitate transfers of legacy swaps. The rule was adopted in response to the possibility of a non-negotiated withdrawal of the UK from the EU. The rule would ensure that “any legacy swap currently exempt from the agencies’ rule on margin for non-cleared swaps would not become subject to the rule if such swap is amended solely for the purpose of transferring it to an affiliate as a result of a non-negotiated UK withdrawal from the EU.” The interim final rule is effective immediately, but the agencies are accepting comments on the rule until 30 days after its publication in the Federal Register.
OCC Issues Bulletin Regarding Updates to Its Handbook
On 15 March, the OCC issued a Bulletin to announce that it had issued the “Recovery Planning” booklet of the Comptroller’s Handbook. The booklet explains “effective recovery planning pursuant to 12 CFR 30, appendix E, ‘OCC Guidelines Establishing Standards for Recovery Planning by Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches.’” The updated booklet replaces a similarly titled booklet issued in April 2018.
Fed Announces Its Seventh Triennial Study to Examine U.S. Payments Usage
On 14 March, the Fed announced that beginning this month, financial institutions and payments organizations will receive invitations to participate in the seventh triennial Federal Reserve Payments Study. The 2019 Federal Reserve Payments Study will “administer two surveys, each contributing valuable information required to obtain robust estimates of totals and developing trends in the number and value of payments made with checks, cards, electronic transfers, and various alternative payment initiation methods and systems for calendar year 2018.”
· March 21: Comments due on the Fed’s proposed rule that would “amend the Board’s company-run stress tests and supervisory stress test rules, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.”
· March 21: Comments due on the SEC’s request for comment regarding earnings releases and quarterly reports.
· March 25: The CFTC will hold an open meeting to discuss, among other things: (i) “Amendment to the Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants”; (ii) “Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants”; (iii) “Final Rule Amending Regulations on Segregation of Assets Held as Collateral in Uncleared Swap Transactions”; and (iv) “Final Rule Regarding the De Minimis Exception to the Swap Dealer Definition – Swaps Entered into by Insured Depository Institutions in Connection with Loans to Customers.”
· March 27: The CFTC’s Technology Advisory Committee will hold a meeting.