US Regulatory Research
OMB Director Wright Sends Memorandum to Executive Departments and Agencies Regarding CRA
On 11 April, Office of Management and Budget (“OMB”) Acting Director Russell T. Vought sent a memorandum to the heads of executive departments and federal agencies regarding the obligations of federal agencies under the Congressional Review Act (“CRA”). The memo reaffirms the need for federal agencies to coordinate with the White House before publishing a regulatory action—including guidance—that may be considered economically significant. It underscores that “major” rules which generally have a projected impact of $100 million or more get flagged for Congress and are subject to a delayed effective date to give Congress time to consider potential disapproval of the rule. Vought wrote: “While agencies have an ongoing responsibility to comply with the CRA, the major determination process outlined here will take full effect on May 11, 2019. This Memorandum supercedes earlier OMB guidance on the CRA.”
House Financial Services Subcommittee Holds Hearing on the Community Reinvestment Act
On 9 April, the House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions held a hearing entitled “The Community Reinvestment Act: Assessing the Law’s Impact on Discrimination and Redlining.” Testifying at the hearing were: Jesse Van Tol, CEO, National Community Reinvestment Coalition; Mehrsa Baradaran, Associate Dean for Strategic Initiatives & Robert Cotten Alston Chair in Corporate Law, University of Georgia School of Law; Clint Odom, Senior Vice President of Policy and Advocacy and Executive Director of Washington Bureau, National Urban League; Benson Doyle Mitchell, Jr., President and CEO, Industrial Bank, Representative of National Bankers Association; Aaron Glantz, Senior Reporter, Reveal from The Center for Investigative Reporting; and Benson F. Roberts, President and CEO, National Association of Affordable Housing Lenders. Chairman Meeks (D-NY) focused on the benefits of the Community Reinvestment Act, as well as the need to modernize and update it to consider nonbank lenders and fintechs. He expressed concern with the Office of the Comptroller of the Currency’s (“OCC”) recent Community Reinvestment Act proposal. Ranking Member Luetkemeyer (R-MO) said, “. . . over 40 years later the [Act] has proven to be an overly burdensome requirement for financial institutions while granting broad authority to regulators with little transparency and clarity on how to comply.” The witnesses generally supported strengthening the Act and putting in place similar standards for fintech companies.
House Financial Services Committee Receives Annual Testimony of the Treasury Secretary
On 9 April, the House Financial Services Committee held a hearing entitled “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.” Department of the Treasury (“Treasury”) Secretary Steven Mnuchin testified at the hearing. Secretary Mnuchin highlighted the positive impacts of the Tax Cuts and Jobs Act, urged Congress to support the U.S.-Mexico-Canada Agreement, discussed Treasury’s commitment to implementing the Foreign Investment Risk Review Modernization Act, and discussed Treasury’s work with the IMF and World Bank to reduce risks of financial crises. Committee Members asked questions on topics ranging from sanctions and tariffs to reforming the Export-Import Bank. Ranking Member McHenry asked about Brexit planning and the health of the financial system, and Rep. Maloney (D-NY) asked if her beneficial ownership bill was “headed in the right direction” to which Secretary Mnuchin replied that he thought it generally was.
House Appropriations Subcommittee Holds Hearing on Treasury’s FY 2020 Budget Request
On 9 April, the House Committee on Appropriations’ Subcommittee on Financial Services & General Government held a hearing regarding Treasury’s budget request of fiscal year (“FY”) 2020. Treasury Secretary Mnuchin’s prepared remarks focused on several of the subjects he covered in the House Financial Services Committee hearing discussed immediately above.
House Financial Services Committee Holds Hearing on GSIBs
On 10 April, the House Financial Services Committee held a hearing entitled “Holding Megabanks Accountable: A Review of Global Systemically Important Banks [“GSIBs”] 10 years after the Financial Crisis.” Testifying at the hearing were: Michael L. Corbat, Chief Executive Officer, Citigroup; Jamie Dimon, Chairman & Chief Executive Officer, JP Morgan Chase & Co.; James P. Gorman, Chairman & Chief Executive Officer, Morgan Stanley; Brian T. Moynihan, Chairman & Chief Executive Officer, Bank of America; Ronald P. O’Hanley, President & Chief Executive Officer, State Street Corporation; Charles W. Scharf, Chairman & Chief Executive Officer, Bank of New York Mellon; and David M. Solomon, Chairman & Chief Executive Officer, Goldman Sachs. Many Committee Democrats focused on the size of the banks, executive compensation, bank profits, bank fines, and diversity and inclusion issues. Committee Republicans focused on other issues affecting risk in the system, such as Brexit and cybersecurity, and regulatory requirements, including Anti-Money Laundering/Bank Secrecy Act and capital requirements. The witnesses largely discussed the improvements made at their banks since the financial crisis, including better capitalization, more liquidity, and better ability to handle shocks.
SEC & Securities
SEC’s OIEA Launches Investor Education Campaign
On 8 April, the Securities and Exchange Commission (“SEC”) announced that its Office of Investor Education and Advocacy (“OIEA”) launched a public service campaign encouraging Main Street investors to use the SEC’s online resource for investor education to seek answers to questions about investing.
SEC’s Division of Corporation Finance Publishes No-Action Letter Regarding “Collar Contracts”
On 8 April, the SEC’s Division of Corporation Finance published a no-action letter in response to a letter from Bank of America Merrill Lynch regarding the application of Rule 16c-4 under Section 16 of the Exchange Act of 1934 to proposed option-based “Collar Contracts” with insiders. SEC staff determined that, for the purposes of applying Rule 16c-4 to the proposed Collar Contracts, an insider will be deemed to own the corporation shares underlying the operating partnership units subject to the Collar Contract. As such, the no-action letter would permit corporate insiders to enter into short option positions in their employer’s common stock, provided that such short options are economically offset by the insiders’ long position in a partnership unit that is convertible into the employer’s common stock.
Annual SEC Speaks Conference Is Held
On 8 and 9 April, the Practising Law Institute hosted the 2019 SEC Speaks Conference, which included discussions with SEC Chairman Jay Clayton, current and former SEC Commissioners, and SEC staff.
o On 8 April, Chairman Clayton delivered remarks entitled “Management’s Discussion and Analysis of the SEC,” during which he discussed factors and trends affecting results of the SEC’s operations, including its ability to attract and retain quality personnel, invest in new technology, plan for the potential effects of Brexit, and effectively identify and manage internal and external risk. He highlighted accomplishments made by the SEC in 2018, including: (i) the advancement of “23 of the 26 rules” on the near-term rulemaking agenda, such as amendments to the definition of “smaller reporting company” and amendments to improve the transparency requirements governing alternative trading systems (“ATSs”); (ii) the launch of a long-term project to explore modernization of the design, delivery and content of fund disclosures and the adoption of rule 30e-3; and (iii) proposed Regulation Best Interest, which would “enhance and clarify the standards of conduct and mandated disclosures for . . . broker-dealers and investment advisers.” Clayton commended the Division of Enforcement’s Share Class Selection Disclosure Initiative, which sought to address issues with 12b-1 fee disclosures related to the cost of mutual fund share classes sold to retail investors. He noted that the Initiative will “result in the return of over $125 million to retail investors,” and that “the Commission returned $794 million to harmed investors” in fiscal year 2018.
o On 8 April, Commissioner Elad Roisman delivered remarks entitled “Encouraging Smaller Entrants to Our Capital Markets,” during which he addressed barriers to small business capital formation in the context of initial public offerings and access to secondary market liquidity. Roisman encouraged the SEC to, among other things: (i) take “steps to harmonize the maze of regulations that comprise the exempt offering framework,” which he hopes will lead entrepreneurs to conduct public offerings at earlier stages; (ii) address the topic of “finders” (who introduce companies to prospective investors) through clear guidance regarding whether their “activity implicates broker-dealer status”; and (iii) “take proactive steps to encourage entrepreneurs to take advantage of the federal securities laws drafted with them in mind.” Roisman also addressed equity market structure reform, specifically whether current best execution requirements should be revised to reflect “a comprehensive and non-prescriptive interpretation of the regulatory requirement” and whether the order protection rule “is still needed or if adjustments are warranted.”
o On 8 April, Commissioner Hester Peirce delivered remarks entitled “SECret Garden,” during which she commented on the complexity of the regulatory framework governing US markets in the context of a book titled The Secret Garden. Peirce expressed concern that tools used by the SEC to “provide clarity, certainty, and workability to the people who operate within [this] regulatory framework,” such as staff-level guidance and no-action letters, “may have turned into a body of secret law . . . [which] binds market participants like law does but is immune from judicial—and even Commission—review.” She concluded by encouraging SEC staff and Commissioners to consider “how and where the lines are being crossed” in the context of this “secret law.”
o On 8 April, Rick Fleming, the SEC’s Investor Advocate, delivered remarks entitled “Important Issues for Investors in 2019,” during which he expressed support for proposals to: (i) improve transparency around exchanges’ proprietary data fees, and (ii) suspend unlisted trading privileges in order to improve liquidity in thinly traded securities. Fleming advocated caution regarding SEC efforts to impose new regulations on proxy advisory firms, noting that “investors who are paying for this service are not the ones who are expressing those concerns.”
o On 8 April, Martha Miller, the SEC’s Advocate for Small Business Capital Formation, delivered remarks entitled “Bolstering Capital Formation: The Third Leg of the SEC's Mission,” during which she introduced plans for the SEC’s new Office of the Advocate for Small Business Capital Formation.
SEC Indicates Intention to Approve Application for Non-Transparent ETF
On 11 April, the SEC published a notice indicating its intention to grant exemptive relief to “permit registered open-end investment companies that are exchange-traded funds [(“ETFs”)] and are actively managed to operate without being subject to the current daily portfolio transparency condition in actively managed ETF orders.” An order granting the requested relief will be issued unless a hearing is ordered; hearing requests are due by 3 May 2019.
SEC Issues Agenda for FIMSAC Meeting
On 11 April, the SEC released the agenda for the April 15 meeting of the Fixed Income Market Structure Advisory Committee (“FIMSAC”). According to the agenda, the FIMSAC will discuss: (i) past FIMAC recommendations regarding a pilot program for block-size trades in corporate bonds and to establish a new issue reference data service for corporate bonds; (ii) draft recommendations on pennying in the corporate bond and municipal securities markets and on certain principal transactions with advisory clients; (iii) updates from the FIMSAC’s subcommittees on credit ratings, ETFs and bond funds, and corporate bond transparency; and (iv) implications for the corporate bond and municipal securities markets related to a transition away from the London Inter-bank Offered Rate (“LIBOR”).
CFTC & Derivatives
CFTC Commissioner Behnam Delivers Remarks at ISDA General Meeting
On 9 April, CFTC Commissioner Rostin Behnam delivered remarks at the International Swaps and Derivatives Association (“ISDA”) annual general meeting in Hong Kong. Behnam discussed the CFTC’s efforts to: (i) encourage transition from LIBOR to alternative risk-free rates; (ii) implement initial margin rules that are consistent with international rules and guidance; (iii) implement regulatory reform for swap execution facilities; and (iv) replace the current guidance-based approach to cross-border application of the CFTC’s swap regime with a rule-based framework with greater regulatory deference to third-country regulatory jurisdictions.
CFTC Chairman Giancarlo Delivers Remarks at FSB Meeting on LIBOR Reform
On 10 April, CFTC Chairman J. Christopher Giancarlo delivered remarks at a Financial Stability Board (“FSB”) industry roundtable regarding the need to reform major interest rate benchmarks such as LIBOR. Giancarlo noted that market participants have been warned “of the high likelihood that LIBOR will no longer be available after 2021” and will be replaced by alternatives such as the Secured Overnight Financing Rate (“SOFR”). He explained that the CFTC’s expectation is that in the next 12 months “SOFR futures and swaps [markets], as well as related debt markets - will hit critical levels where liquidity begets liquidity.” He concluded that the CFTC is prepared to provide necessary guidance, relief, and other support “to incentivize transition to SOFR-based benchmarks.”
CFTC Chairman Giancarlo Delivers Remarks Before CFTC’s AAC
On 11 April, Chairman Giancarlo delivered opening remarks before a meeting of the CFTC’s Agricultural Advisory Committee (“AAC”) in Overland Park, Kansas. Giancarlo emphasized the importance of marketplace engagement and the creation of a regulatory environment that supports innovation. According to the agenda, the AAC also discussed: (i) the operational and regulatory environment for futures commission merchants; (ii) technological, transparency and operational innovations in agricultural cash markets; and (iii) the evolution of electronic trading in agricultural markets and the role of matching algorithms.
CFTC Chairman Giancarlo Delivers Remarks at the 2019 Agricultural Commodity Futures Conference
On 11 April, Chairman Giancarlo delivered remarks at the 2019 Agricultural Commodity Futures Conference hosted by the CFTC and Kansas State University’s Center for Risk Management Education and Research in Overland Park, Kansas. Giancarlo explained that “market-based price discovery” is “a key mechanism underpinning the American agricultural economy,” while also noting that the “conference comes about at one of the most difficult periods for the agricultural sector in a generation.” According to the agenda, key issues impacting agricultural markets include, among others, effects of futures trading matching algorithms, grain and oilseed futures convergence, significant news events, and risk management.
Fed Vice Chair Delivers Remarks on the Fed’s Review of its Monetary Policy Strategy, Tools, and Communication Practices
On 9 April, Federal Reserve (“Fed”) Vice Chair Richard H. Clarida delivered remarks at the “Fed Listens: Distributional Consequences of the Cycle and Monetary Policy” Conference. His speech touched on the policy strategy, tools, and communication practices that the Federal Open Market Committee (“FOMC”) uses to pursue the Fed's dual mandate. He noted that the Fed has been “charged by the Congress with a dual mandate to achieve maximum employment and price stability” and that it was “an especially opportune time to conduct this review” since the “U.S. economy [is] operating at or close to our maximum-employment and price-stability goals.” He emphasized that the “review of our current framework will be wide ranging,” but highlighted three questions that will guide the review: (i) “can the Federal Reserve best meet its statutory objectives with its existing monetary policy strategy, or should it consider strategies that aim to reverse past misses of the inflation objective”; (ii) “are the existing monetary policy tools adequate to achieve and maintain maximum employment and price stability, or should the toolkit be expanded”; and (iii) “how can the FOMC’s communication of its policy framework and implementation be improved.” He expects the Fed to publish its findings in the first half of 2020.
o On 11 April, Fed Vice Chair Clarida delivered remarks at the Washington Policy Summit regarding the outlook for the U.S. economy and the Fed’s monetary policies. Vice Chair Clarida reiterated the points he had made during his 9 April 2019 speech, including those related to the economic outlook and the Fed’s review of its monetary policy strategy, tools, and communications practices. In addition, Vice Chair Clarida discussed the Fed’s revised Balance Sheet Normalization Principles and Plans, which was released as part of the FOMC meeting held on 19-20 March 2019.
U.S., European Banking Union, and UK Officials to Meet for Planned Coordination Exercise on Cross-Border Resolution Planning
On 9 April, the FDIC announced that it will host an event on 13 April 2019 as part of a series of planned exercises to enhance understanding of different resolution regimes for GSIBs and to strengthen coordination on cross-border resolution. Expected participants include senior officials from U.S. banking regulators, the CTFC, the SEC, the European Banking Union, the European Commission, the European Central Bank, the Bank of England, and the Prudential Regulation Authority.
Fed and FOMC Release FOMC Meeting Minutes for March 19-20
On 10 April, the Fed and FOMC released the minutes for the FOMC meeting held on March 19-20. Among other matters, the FOMC discussed: (i) the normalization of the Fed’s balance sheet and the release of the Fed’s revised Balance Sheet Normalization Principles and Plans; (ii) developments in financial markets and open market operations, including a review of labor market and financial market conditions; and (iii) the outlook on the U.S. economy. In addition, the FOMC voted to: (i) maintain the interest rate paid on required and excess reserve balances at 2.40 percent, effective March 21, 2019; (ii) maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent; and (iii) approve the establishment of the primary credit rate at the existing level of 3.00 percent.
Fed Vice Chair for Supervision and Chair of the FSB Delivers Remarks Regarding Progress on the Transition of Risk-Free Rates
On 10 April, Fed Vice Chair for Supervision and Chair of the FSB Randal Quarles delivered remarks at the Financial Stability Board Roundtable on Reforming Major Interest Rate Benchmarks, regarding progress on the transition from LIBOR to the risk-free rates. Vice Chair Quarles noted that “SOFR futures, which did not exist a year ago, have seen more than $7 trillion in cumulative notional volumes,” a “crucial development for market liquidity [that] is helping to spur the growth of SOFR swaps and other derivative markets.” He noted, however, that “we have only a little over two and a half years until the point at which LIBOR could end” and warned that the transition needs to “continue to accelerate.”
o April 15: The CFTC will hold a public meeting of its Global Markets Advisory Committee.
o April 15: The SEC will hold a meeting of its Fixed Income Market Structure Advisory Committee.
o April 16: The FDIC will hold an open board meeting regarding, among other subjects, proposed changes to “Applicability Threshholds for Regulatory Capital Requirements for Certain U.S. Subsidiaries of Foreign Banking Organizations and Application of Liquidity Requirements to Foreign Banking Organizations.
o April 16: Comments due on the SEC’s proposed rule regarding risk mitigation techniques for uncleared security-based swaps.
o April 17: The CFTC will hold a public meeting of its Energy and Environmental Markets Advisory Committee.
o April 18: Comments due on Fed, FDIC, OCC, Federal Housing Finance Agency, and Farm Credit Association’s interim final rule regarding “Margin and Capital Requirements for Covered Swap Entities.”
o April 19: Comments due on OCC’s proposed rule to “provide partial assessment refunds to national banks, Federal Savings Associations . . . that exit OCC jurisdiction.”
o April 29: Comments are due on the SEC’s proposed rule regarding solicitations of interest prior to a registered public offering.