US Regulatory Research
Treasury Secretary Mnuchin Delivers Remarks on Treasury’s International Work
On 13 May, Secretary of the Department of the Treasury (“Treasury”) Steven Mnuchin delivered remarks at the National Association of Insurance Commissioners (“NAIC”) International Forum. Mnuchin spoke about, among other issues, Treasury’s commitment to “continued engagement in the international standard-setting work at the International Association of Insurance Supervisors (“IAIS”), working closely together with the other member of ‘Team USA’ – U.S. states, the NAIC, and the Federal Reserve Board.” Mnuchin noted that international standards adopted by IAIS are non-binding in the United States unless adopted as domestic law, but such standards must be taken into account by U.S. insurers operating in foreign markets.
Forty-Two Senators Send Letter to Fed Vice Chair for Supervision Quarles Regarding Insurance Supervision
On 13 May, 42 U.S. senators sent a letter to Federal Reserve (“Fed”) Vice Chair for Supervision Randal Quarles commending him on his January 2019 speech regarding insurance supervision and international engagement. The letter stated that the senators were pleased to hear that Quarles was working with his foreign counterparts “to establish an assurance that the United States regime of state-based insurance regulation is, in [Quarles’] words, ‘deemed comparable to the [International Capital Standard]’ being developed by the [IAIS].” The letter then went on to discuss specific concerns of the senators, including their “view that the [Financial Stability Board] should publicly state that a global capital standard for insurers is not required.”
Thirteen House Democrats Send Letter to Fed Chair Powell and Fed Vice Chair for Supervision Quarles Regarding Recent Deregulation
On 13 May, 13 Democratic members of the U.S. House sent a letter to Fed Chair Jay Powell and Fed Vice Chair for Supervision Quarles “to express alarm at a host of recent deregulatory moves by the Fed that seem to ignore lessons from the 2008 financial crisis and greenlight the same risky financial activity that led to the last crash.” The letter focused on several specific Fed actions, including: (i) “its decision to maintain the Countercyclical Capital Buffer (“CCB”) at its current level of 0 percent,” and (ii) the Fed’s announcement “that it was eliminating the ‘qualitative’ portion of its stress tests for 2019.”
House Passes Four Financial Services Bills
On 14 May, the U.S House passed four financial services bills:
o H.R. 2578, the National Flood Insurance Program Extension Act of 2019, which would extend the National Flood Insurance Program’s authorization to 30 September 2019.
o H.R. 389, the Kleptocracy Asset Recovery Rewards Act, which would establish a rewards program to incentivize individuals to notify the U.S. government of assets in U.S. financial institutions that are linked to foreign corruption;
o H.R. 1060, the Building Up Independent Lives and Dreams Act, which would allow nonprofit organizations, such as Habitat for Humanity, offering mortgages for charitable purposes to use certain alternative forms to satisfy disclosure requirements; and
o H.R. 1037, the Banking Transparency for Sanctioned Persons Act, which would require the Treasury Secretary to report to Congress semiannually on a list of licenses issued to financial institutions to provide services to countries and persons subject to U.S. sanctions.
All Twenty-Six Republican Members of House Financial Services Committee Send Letter to Heads of Bank Regulators
On 14 May, all 26 Republicans on the U.S. House Committee on Financial Services (“House Financial Services Committee”) sent a letter (attached) to the heads of the Fed, Federal Deposit Insurance Corporation (“FDIC”), Office of the Comptroller of the Currency (“OCC”), Securities and Exchange Commission (“SEC”), Commodity Futures Trading Commission (“CFTC”), and Treasury’s Financial Stability Oversight Council “to encourage expeditious implementation of several recommendations included in the U.S. Department of Treasury’s report series, A Financial System That Creates Economic Opportunities.” The letter claimed that the banking agencies had acted on only a third of the recommendations in the one and half years since the initial report was issued. The lawmakers highlighted the following issues, among others, that should be addressed quickly: (i) revisiting the international standards placed on U.S. firms, including the risk-based surcharge for U.S global systemically important banks; (ii) “exempting transactions between bank affiliates from initial margin requirements on uncleared swaps”; and (iii) “[bringing] greater transparency to the [agencies’] capital planning and stress testing process so that lending and investment are not unnecessarily restricted.”
Senate Banking Committee Holds Hearing on Oversight of Financial Regulators
On 15 May, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) held a hearing entitled “Oversight of Financial Regulators.” Testifying at the hearing were: Joseph Otting, Comptroller of the Currency at the OCC; Randal Quarles; Jelena McWilliams, Chairman of the FDIC; and Rodney Hood, Chairman of the National Credit Union Administration. The witnesses all emphasized the strength of the financial system and discussed their agencies’ progress in implementing the Economic Growth, Regulatory Relief, and Consumer Protection Act (“Act”). Otting noted that most of the remaining requirements implementing the Act, including narrowing the Volcker rule and implementing a community bank leverage ratio, will be finished in the third quarter. Quarles discussed the Fed’s efforts to (i) tailor prudential requirements for the U.S. operations of foreign banks (ii) provide target relief for community banks and other less complex organizations; and (iii) “consolidate the role that stress testing plays” in the Fed’s work. McWilliams noted that she is nearly halfway through a 50-state listening tour, which has helped her “fully appreciate how our banks, particularly community banks, are so intimately involved in the very fabric of their community's and the customer's lives.”
Senate Subcommittee Holds Hearing on Treasury’s FY2020 Budget Request
On 15 May, the U.S. Senate Committee on Appropriations’ Subcommittee on Financial Services and General Government held a hearing to review the fiscal year (“FY”) 2020 budget request of the Treasury. Treasury Secretary Steven Mnuchin testified at the hearing. Mnuchin began by stating that “President Trump’s economic program of tax cuts, regulatory relief, and improved trade deals is resulting in more jobs and higher wages for hardworking families.” Mnuchin testified that Treasury’s budget request “reflects our objectives of fostering strong economic growth and protecting our national security and technology infrastructure,” and he then highlighted several parts of the budget request, including: (i) funding for the Internal Revenue Service’s Integrated Business Systems Modernization Account; (ii) funding for the continued implementation of the Foreign Investment Risk Review and Modernization Act; and (iii) enhanced funding for Treasury's Office of Terrorism and Financial Intelligence and the Financial Crimes Enforcement Network (“FinCEN”).
House Financial Services Subcommittee Holds Hearing on Worker Protections
On 15 May, the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets held a hearing entitled “Promoting Economic Growth: A Review of Proposals to Strengthen the Rights and Protections for Workers.” Testifying are the hearing were: Steven Clifford, former CEO of King Broadcasting Company; Heather Slavkin Corzo, Director of Capital Markets Policy, AFL-CIO; Abigail Disney, President of Fork Films and Chair & Co-founder of Level Forward; Nili Gilbert, Co-founder & Portfolio Manager, Matarin Capital Management; and James Copland, Senior Fellow and Director, Legal Policy, Manhattan Institute for Policy Research. The following bills were considered:
the Outsourcing Accountability Act, a draft bill to amend the Securities Exchange Act of 1934 (“Exchange Act”) to require the disclosure of the total number of domestic and foreign employees of a company;
a draft bill to amend the Exchange Act to require issuers to disclose information about human capital management in annual reports;
a draft bill to require the SEC to study stock buybacks under SEC Rule 10b-18; and
the Greater Accountability in Pay (GAP) Act of 2019, a draft bill to, among other purposes, amend the Exchange Act to require issuers to disclosed information on pay raises made to executives and non-executive employees
House Financial Services Subcommittee Holds Hearing on Sanctions
On 15 May, the House Financial Services Committee’s Subcommittee on National Security, International Development, and Monetary Policy held a hearing entitled “Assessing the Use of Sanctions in Addressing National Security and Foreign Policy Changes.” Testifying at the hearing were: David Mortlock, Nonresident Senior Fellow, Global Energy Center, Atlantic Council; Michael Carpenter, Senior Director, Penn Biden Center for Diplomacy and Global Engagement, University of Pennsylvania; Elizabeth Rosenberg, Senior Fellow and Director of the Energy, Economics, and Security Program, Center for a New American Security; Daleep Singh, Senior Fellow, Center for New American Security; and Matthew Zweig, Senior Fellow, Foundation for Defense of Democracies. The hearing considered a draft bill to respond to and deter Russian attacks on the integrity of United States elections. Mortlock suggested three principles for the subcommittee to consider for any imposition of sanctions: “First of all, sanctions should only be deployed in pursuit of a clear broader policy goal. Second, sanctions regime must have an end game or an exit strategy, and third, sanctions must be backed up by a firm political commitment.” Carpenter testified that “[s]anctioning the Russian financial sector one bank at a time is a smart way to ratchet up pressure while keeping some of our powder dry for another day.” Rosenberg noted that new sanctions could include the areas of “[f]inancial services including related to issuance of sovereign debt, defense, intelligence, technology and other economic sectors, as well as further measures targeting oligarchs.” Singh’s main recommendation was “to ban purchases of new Russian sovereign debt in any currency.”
House Financial Services Committee Holds Hearing on Oversight of Prudential Regulators
On 16 May, the House Financial Services Committee held a hearing entitled “Oversight of Prudential Regulators: Ensuring the Safety, Soundness and Accountability of Megabanks and Other Depository Institutions.” Testifying at the hearing were the same agency heads who testified at the Senate hearing discussed above: Joseph Otting, Randal Quarles, Jelena McWilliams, and Rodney Hood. The witnesses’ testimony mirrored their testimony in the Senate hearing the preceding day. Committee Chairwoman Maxine Waters (D-CA) questioned the witnesses about the BB&T and SunTrust merger, while Ranking Member Patrick McHenry (R-NC) asked McWilliams and Otting about the valid-when-made issue for nonbanks and asked Quarles about the switch from the London Inter-bank Offered Rate to the Secured Overnight Financing Rate. Chair Meeks and Ranking Member Luetkemeyer of the Subcommittee on Consumer Protection and Financial Institutions both expressed concerns with the Financial Accounting Stability Board’s Current Expected Credit Loss standard, urging for delayed implementation until the consequences are studied. Otting was asked about the OCC’s efforts to modernize the Community Reinvestment Act, and whether a proposal would be out by December, to which he replied that it is “a highly complex thing that hasn’t been looked at since 1977” but that “[i]t would be [his] goal” to have the proposal out by December. The regulators noted they would expect this to be a joint proposal. The witnesses were also asked about Volcker rule reform. Quarles took the lead, noting that hundreds of comments have been received and that the five relevant agencies have been reviewing the comments. He said that “[o]ur expectation is that we will have responses to those comments within . . . the next couple months.” He noted that regarding covered funds, the proposal last year asked questions as opposed to having a specific proposal, so there will at least be an initial proposal on how to address covered funds and an additional comment period afterwards.
SEC & Securities
OCIE Director Delivers Remarks on Staying Vigilant to Protect Investors
On 15 May, the SEC published remarks delivered by Peter Driscoll, Director of the Office of Compliance Inspections and Examinations (“OCIE”), on 8 May at the SIFMA Operations Conference in Boca Raton, Florida. Driscoll focused his remarks on four key areas relevant to retail investor protection: anti-money laundering (“AML”), microcap securities, paying agents, and cybersecurity. Specifically, Driscoll encouraged firms to (i) conduct independent testing to “[identify] weaknesses and failures of the firm’s AML program;” (ii) be mindful of FinCEN’s customer due diligence rule; (iii) “scrutinize red flags of manipulation, fraud, and inaccurate issuer information when publishing quotations of over-the-counter securities in connection with Rule 15c2-11”; (iv) “examine [their] compliance with the locate requirements of Regulation SHO”; (iii) “ensure that [the] firm has the necessary policies, procedures and controls in place to ensure compliance with the lost security holder rule”; (v) examine practices to ensure that safeguarding and customer protection rules are followed; and (vi) ensure that cybersecurity and technology controls are appropriately robust to protect customer information.
SEC Commissioner Peirce Delivers Remarks Regarding Smart Regulation
On 16 May, SEC Commissioner Peirce delivered remarks at the George Mason University Antonin Scalia Law School in Arlington, Virginia, in a speech entitled “Alligators in Nirvana: Smart Regulation and the Future of Financial Services-Public Policy Conference.” In her remarks, Peirce reflected on the work of two economists: American economist Harold Demsetz and Hungarian economist and political theorist Anthony de Jasay. In the context of lessons learned from Demestz’s work, Peirce noted that the SEC’s recent proposal to exempt certain companies from the requirement to obtain an auditor attestation of their internal controls “recognizes that — for a subset of companies that are small and have low revenues — investors might rationally decide to retain the risk and spare the expense of paying an auditor.” Peirce also highlighted insights of Jasay’s work that are relevant to contemporary debates, such as those regarding accredited investor standards which “preclude many Americans from investing in private companies and diminish the funding options for entrepreneurs.”
CFTC & Derivatives
Director of CFTC’s DSIO Delivers Remarks at New York City Bar Association
On 14 May, Matthew Kulkin, Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight (“DSIO”), delivered remarks at the New York City Bar Association. During his remarks, Kulkin addressed two of the DSIO’s “principal guiding factors” in its approach to developing new proposed rules or proposed amendments to existing rules: regulatory compliance costs and impact to market quality. In line with the DSIO’s goal to reduce regulatory compliance costs, Kulkin discussed the CFTC’s Project KISS initiative, including efforts to: (i) streamline chief compliance officer duties and annual reports; (ii) reduce regulatory burdens associated with swap dealer segregation notices; (iii) provide relief for designated self-regulatory organizations; and (iv) codify certain commodity pool operator and commodity trading advisor staff letters. He also noted that the “DSIO is actively considering additional possible recommendations on other similar initiatives that could improve market quality,” including: (i) a floor trader exclusion for swap dealing; (ii) permitted investments for future commission merchants; and (iii) measures related to Phase Five uncleared margin implementation.
CFTC Commissioner Berkovitz Delivers Keynote Address at Energy Risk 2019
On 14 May, CFTC Commissioner Dan Berkovitz delivered remarks at the Energy Risk 2019 Summit in Houston, Texas. In his remarks, Berkovitz discussed the work of the CFTC’s Energy and Environmental Markets Advisory Committee ("EEMAC"), of which he is a sponsor, and “urged the Commission to consider several other regulatory measures to foster competition and reduce concentration in swaps trading.” In order to facilitate competition in derivatives markets, he advocated for maintaining the swap dealer registration threshold at $8 billion, encouraged the CFTC and prudential regulators regarding “consulting and coordinating with each other on financial regulatory issues,” and “support[ed] meaningful position limits to prevent excessive speculation in commodity markets.” Berkovitz also emphasized that he voted against the CTFC’s swap execution facilities (“SEF”) proposal, stating: “the SEF Proposal would eviscerate the requirement in the Dodd-Frank Act that SEFs establish rules that ‘provide market participants with impartial access to the market.’”
CFTC Approves ICE Futures “Speed Bump” on Orders Executed Against “Resting” or “Passive” Orders
On 15 May, the CFTC approved ICE Futures U.S., Inc.’s (“ICE Futures”) recent self-certified filing to allow for the implementation of "Passive Order Protection" ("POP") functionality, which is “designed to reduce latency advantages between traders engaged in arbitrage strategies against related markets.” POP functionality would introduce a short delay for incoming orders that would otherwise transact immediately opposite “resting” or “passive” orders, thereby “giving all traders who have placed a resting order additional time to react to price changes in related markets.” In the filing, ICE Futures noted that it intends to implement the functionality in the Gold Daily and Silver Daily futures markets.
o CFTC Commissioner Berkovitz issued a statement disagreeing with the action, stating: “In the case of POP, the Commission is faced with an asymmetric speed bump that penalizes certain order types (aggressing orders) and trading strategies (cross-market arbitrage), while also discriminating against market participants that have developed the skill and invested in the technology to thrive in modern markets.” Berkovitz alleged that “[a]symmetric speed bumps, such as POP . . . are discriminatory, anti-competitive, and facially inconsistent with the fundamental objectives of the Commodity Exchange Act (“CEA”) to promote ‘responsible innovation and fair competition . . . among market participants’” and that ICE Futures’ filing fails to support “[c]onclusory assertions that the asymmetric speed bump will reduce latency arbitrage and ‘attract additional participants and liquidity to the screen.’”
o CFTC Commissioner Brian Quintenz issued a statement expressing concern that the filing seeks to “equalize downward” (i.e., by “penalizing advantages in order to equalize at the lowest level”). Quintenz noted: “[the filing’s] potential ramifications on the perpetual forces of efficient market evolution are profound.”
o CFTC Commissioner Dawn Stump issued a statement regarding the self-certified filing, noting that, due to a lack of reliable data or empirical analysis, she is “unable to conclude within the bounds of the self-certification standard prescribed by the CEA that . . . [POP Functionality] is inconsistent with the CEA or the Commission’s regulations.”
GAO Issues Report on Bank Supervision
On 14 May, the Government Accountability Office (“GAO”) issued a report entitled “BANK SUPERVISION – Regulators Improved Supervision of Management Activities but Additional Steps Needed.” The report concluded that, among other findings: (i) the federal banking regulators’ post-2008 “updated policies and procedures generally were consistent with leading risk-management practices, including federal internal control standards”; and (ii) “[e]xamination documents that GAO reviewed showed that examiners generally applied the regulators’ updated policies and procedures to assess management oversight at large depository institutions.” The report, however, noted several problems, including that “[w]ritten communications of supervisory concerns from the [FDIC] and [Fed] that GAO reviewed often lacked complete information about the cause for the concern and, for the [Fed], also lacked information on the potential consequences of the concern.”
Fed Governor Brainard Delivers Speech the Relationship Between Inflation and Employment
On 16 May, Fed Governor Lael Brainard delivered a speech at the National Tax Association 49th Annual Spring Symposium entitled “The Disconnect between Inflation and Employment in the New Normal.” Governor Brainard discussed three changes in macroeconomic relationships since the 2008 financial crisis, which she termed as the “new normal,” including: (i) low sensitivity of inflation to changes in labor market slack; (ii) a low long-term neutral rate of interest; and (iii) low underlying trend inflation. She explained that this has led to a “weakening in the relationship between inflation and employment,” and, thus, “we should not assume monetary policy will act to restrain the financial cycle as much as previously.” She warned that, consequently, policymakers may need to think about financial stability differently than before and that the Fed will “proceed cautiously, helping to sustain the expansion and further gains in employment and with appropriate regulatory safeguards that reduce the risk of dangerous financial imbalances.”
FOMC Announces Tentative Meeting Schedule for 2020
On 17 May, the Fed’s Federal Open Market Committee (“FOMC”) announced its tentative meeting schedule for 2020 and early 2021. Meetings tentatively scheduled include: (i) 28-29 January; (ii) 17-18 March; (iii) April 28-29; (iv) 9-10 June 9-10; (v) 28-29 July 28-29; (vi) 15-16 September; (vii) 4-5 November; (viii) 15-16 December; and (ix) 26-27 January 2021.
Fed Vice Chair Clarida Delivers Speech Regarding the Fed’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices
On 17 May, Fed Vice Chair Richard Clarida delivered a speech entitled “The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices.” Vice Chair Clarida mostly reiterated previous comments he had made on 9 April 2019 regarding the Fed’s statutory goals of maximum employment and price stability. He added that the “review is more likely to produce evolution, not a revolution, in the way we conduct monetary policy” and that “any changes to our conduct of monetary policy . . . will be aimed solely at improving our ability to achieve and sustain our dual-mandate objectives in the world we live in today.”
CFPB Requests Comments on Plan to Periodically Review its Regulations under the RFA
On 13 May, the Consumer Financial Protection Bureau (“CFPB”) published and requested comments on a plan for how the CFPB aims to periodically review its regulations that have or will have a significant economic impact upon a substantial number of small entities, pursuant to Section 610 of Regulatory Flexibility Act (“RFA”)(“Section 610 Review”). The plan will require the CFPB to initiate annually a review of rules which have been published for approximately nine years and will focus on examining, among other things: (i) “the continued need for the rule”; (ii) “the nature of public complaints or comments on the rule”; (iii) “the complexity of the rule”; (iv) “the extent to which the rule overlaps, duplicates, or conflicts with federal, state, or other rules”; and (v) “the time since the rule was evaluated or the degree to which technology, economic conditions, or other factors have changed the relevant market.” The plan will also give discretion for the CFPB to consider regulations that are not subject to Section 610 Review. Comments on the proposed plan are due 60 days after their publication in the Federal Register.
o As part of its request for comments, the CFPB announced the launch of its first Section 610 Review regarding its 2009 Overdraft Rule, which limits the ability of financial institutions to “assess overdraft fees for paying automated teller machine . . . and one-time debit card transactions that overdraw consumers' accounts.” The CFPB is requesting comments on the impact of the rule on small entities. Comments on the 2009 Overdraft Rule are due 45 days after the request for comments is published in the Federal Register.
CFPB Announces New Positions
On 13 May, CFPB announced a number of new appointments, including: (i) Brian Johnson as its Deputy Director; (ii) Kate Fulton as its Chief Operating Officer; (iii) Yasaman Sutton as Senior Advisor and Counselor to the Director; and (iv) Melissa Brand as the Director of the Office of Civil Rights.
o May 21: The 2019 Compliance Outreach Program for Municipal Advisors will be held in San Francisco.
o May 21: SEC Commissioner Pierce will give the keynote speech at ETFs Global Markets Roundtable.
o May 21: CFTC Commissioner Quintenz will speak at City Week 2019: International Financial Services Forum.
o May 21: The Senate Banking Committee will hold a hearing on “Combating Illicit Financing by Anonymous Shell Companies Through the Collection of Beneficial Ownership Information.”
o May 21: The House Financial Services Committee will hold a hearing on “Housing in America: Oversight of the U.S. Department of Housing and Urban Development.”
o May 22: The House Financial Services Committee will hold a hearing on “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System- Part II.”
o May 23: The OCC will hold a meeting of its Mutual Savings Association Advisory Committee.