US Regulatory Research
SEC and CFTC Participate in Signing Ceremony for IOSCO EMMoU Regarding Cross-Border Enforcement
On 20 May, the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) published separate press releases, available here and here, regarding their participation in a signing ceremony on 15 May 2019 for the International Organization of Securities Commissions’ (“IOSCO”) Enhanced Multilateral Memorandum of Understanding (“EMMoU”) regarding cross-border regulatory consultation and cooperation and the exchange of information. According to the press release, significant changes in the complexity, sophistication, and size of global financial markets drove adoption of the EMMoU despite an existing 2002 MMoU with 123 signatories that established minimum standards for obtaining and sharing banking, brokerage, and beneficial ownership information.
OMB Releases Spring 2019 Unified Regulatory Agenda
On 23 May, the Office of Management and Budget (“OMB”) released its semi-annual “Spring 2019 Unified Agenda of Regulatory and Deregulatory Actions” (the “Agenda”), which includes “the actions administrative agencies plan to issue in the near term and long term.” The Agenda includes lists from the following financial services regulators:
o The Department of the Treasury (“Treasury”) and the Office of the Comptroller of the Currency (“OCC”) listed, among other rules: (i) a proposed rule on an anti-money laundering program and suspicious activity report filing requirements for investment advisers; (ii) a proposed rule regarding revising prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds (the “Volcker Rule”); and (iii) a proposed rule on a standardized approach for calculating counterparty credit risk.
o The CFTC listed, among other rules: (i) a notice of proposed rulemaking (“NPR”) regarding margin requirements for uncleared swaps for swap dealers (“SDs”) and major swap participants (“MSPs”); (ii) a proposed rule on capital requirements for SDs and MSPs; and (iii) a proposed rule regarding revisions to the Volcker rule.
o The Federal Deposit Insurance Corporation (“FDIC”) listed, among other rules: (i) a NPR on resolution plans; (ii) a proposed rule regarding revisions to the Volcker Rule; and (iii) a proposed rule on the annual stress test.
o The Federal Reserve (“Fed”) listed, among other rules: (i) a proposed rule on changes to applicability thresholds for regulatory capital and liquidity requirements; (ii) a proposed rule regarding revisions to the Volcker Rule; and (iii) a proposed rule regarding prudential standards for large bank holding companies and savings and loan holding companies.
o The SEC listed, among other rules: (i) a NPR on amendments to financial disclosures about acquired businesses; (ii) proposed Regulation Best Interest; and (iii) a proposed rule regarding revisions to the Volcker Rule.
On 20 May, President Trump announced that he intends to nominate (i) Brent McIntosh to be Treasury Undersecretary for International Affairs and (ii) Brian Callahan to be Treasury's General Counsel.
Senate Banking Committee Holds Hearing on Beneficial Ownership
On 21 May, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) held a hearing entitled “Combating Illicit Financing By Anonymous Shell Companies Through the Collection of Beneficial Ownership Information.” Testifying at the hearing were: Kenneth Blanco, Director, Treasury’s Financial Crimes Enforcement Network (“FinCEN”); Steven D’Antuono, Section Chief, Financial Crimes Section, Federal Bureau of Investigation (“FBI”); and Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy, OCC. Blanco testified that “Treasury is committed to working with Congress on developing a bipartisan solution to collecting the critical information to protect our national security and our nation.” D’Antuono explained that Treasury’s Customer Due Diligence (“CDD”) rule requiring banks to obtain beneficial ownership information of companies opening bank accounts is not enough. He said that “some financial institutions conveyed to me there's nothing to stop the company from going to another bank and providing them with different ownership information” and that the FBI welcomes legislation closing these gaps. Gardineer testified that based on examiners’ experience, the OCC has found “the most significant obstacle [in complying with the CDD rule] . . . is the absence of reliable sources against which a bank can independently verify the accuracy of the beneficial ownership information provided when a legal entity opens an account.” She recommended congressional action to require legal entities to provide consistent information when they are formed, or a centralized database to house beneficial ownership information.
House Financial Services Committee Holds HUD Oversight Hearing
On 21 May, the U.S. House Committee on Financial Services (“House Financial Services Committee”) held a hearing entitled “Housing in America: Oversight of the U.S. Department of Housing and Urban Development.” Benjamin Carson, Secretary of the Department of Housing and Urban Development (“HUD”), testified at the hearing. Carson highlighted HUD’s charge against Facebook for violating the Fair Housing Act, the reduction in homelessness rates over the past decade, and HUD’s efforts to ensure HUD-assisted housing is safe and healthy by requiring carbon monoxide detectors in HUD-assisted housing. He also discussed HUD’s Rental Assistance Demonstration, which “has preserved nearly 114,000 units of public housing and generated more than $7 billion in construction activity to revitalize these units or replace them altogether.” With respect to housing finance reform, Carson noted that President Trump recently signed a memo directing him and Treasury Secretary Mnuchin to develop a housing finance reform plan, noting the plan will “ensure that [the Federal Housing Authority] and Ginnie Mae assume primary responsibility for providing housing finance support to low- and moderate-income families that cannot be fulfilled through traditional underwriting.”
House Financial Services Committee Holds Part II of Annual Testimony of the Treasury Secretary
On 22 May, 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- Part II.” Treasury Secretary Steven Mnuchin testified at the hearing. This hearing was a continuation of the annual testimony received on 9 April 2019. Mnuchin received questions on a host of issues, including: (i) the impact of the President’s tariffs on Chinese goods; (ii) how cybersecurity regulation is being harmonized to protect consumers without creating too cumbersome a framework; (iii) requests for the release of the President’s tax returns; (iv) reform of the Financial Stability Oversight Council’s (“FSOC”) designation process; and (v) international insurance negotiations. Regarding Treasury’s new direction for FSOC, Mnuchin was asked what recourse FSOC would have if there were another situation like the financial crisis of 2008, to which he replied that the risks identified would have been picked up under the new approach. When asked for an update on the international insurance negotiations and, specifically, what is being done to ensure we are not subjecting U.S. companies to European standards that do not make sense for the U.S., Mnuchin pointed to a speech he gave on 13 May 2019 on the issue. In that speech, Mnuchin stressed the importance of engagement working with the International Association of Insurance Supervisors and advocating for “development of international standards that reflect the U.S. regulatory structure.”
House Passes Consumers First Act
On 22 May, the U.S. House passed, by a vote of 231 to 191, the Consumers First Act, which would, among other things, revise “provisions related to the administration of the Consumer Financial Protection Bureau, including establishment for staffing levels, political appointees, and the publication of consumer complaints regarding consumer financial products or services.”
SEC & Securities
SEC Chairman Clayton Announces Roundtable on SEC Periodic Reporting System and Regulatory Requirements for Public Companies
On 20 May, Securities and Exchange Commission (“SEC”) Chairman Jay Clayton published a statement announcing a SEC roundtable on short-term and long-term management of public companies, specifically regarding the SEC’s periodic reporting system and regulatory requirements for public companies. Clayton explained that the roundtable, which will be hosted over the summer, “will seek to explore the causes of short-termism and to facilitate conversations on what market-based initiatives and regulatory changes could foster a longer-term performance perspective in American companies.” In that regard, Clayton outlined several potential topics for the roundtable to consider, including: (i) “[t]he role, if any, that short-termism plays in the declining number of public companies”; (ii) the SEC’s “ability to reduce burdens for companies while facilitating better disclosure for long-term Main Street investors”; (iii) “[t]he potential for certain categories of reporting companies, such as smaller reporting companies, to be given flexibility to determine the frequency of their periodic reporting”; and (iv) “[m]arket practices that could be oriented to encourage longer-term thinking and investment at public companies.”
SEC Commissioner Peirce Delivers Remarks Entitled “Sunsets, Russets, and Rule Resets”
On 22 May, the SEC published remarks delivered by SEC Commissioner Hester Peirce on 17 May at the Center for Accounting Research & Education Conference in Leesburg, Virginia. In her speech entitled “Sunsets, Russets, and Rule Resets,” Peirce echoed concerns from regulated entities regarding “just how difficult it is to divine what [the SEC’s] rules require.” Peirce expressed concern that “knowing the letter of the law is not enough” and that firms “must be on the lookout for relevant guidance and case law.” To address these concerns, Peirce suggested that the SEC could: (i) “develop a culture of revisiting [its] rules periodically,” despite “procedural hurdles”; (ii) “encourag[e] [its] examinations and enforcement staff . . . to flag for our rulemaking divisions rules that are in need of updating”; and (iii) “inject some flexibility” into new rules. Peirce also addressed concerns regarding the SEC’s proposed amendments to Section 404(b) of the Sarbanes-Oxley Act to exempt smaller companies from the requirement of an internal control over financial reporting auditor attestation, noting that, under the proposal, managers of such companies would “still be required to conduct an assessment of the companies’ internal controls.” She also shared her view that that the proposal represents a missed opportunity for the SEC to re-align its definitions of “non-accelerated filers” and “smaller reporting companies.”
SEC Announces Open Meeting for 5 June 2019
On 23 May, the SEC announced that it will hold an open meeting on 5 June to consider whether to:
o “adopt a new rule to establish a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities” (Regulation Best Interest);
o “adopt new and amended rules and forms to require registered investment advisers and registered broker-dealers to provide a brief relationship summary to retail investors”;
o “publish a Commission interpretation of the standard of conduct for investment advisers”; and
o “publish a Commission interpretation of the solely incidental prong of section 202(a)(11)(C) of the Investment Advisers Act of 1940.”
SEC, NASAA, and FINRA Issue Fact Sheet Concerning Senior Financial Exploitation
On 23 May, the SEC, North American Securities Administrators Association (“NASAA”), and Financial Industry Regulatory Authority (“FINRA”) issued a fact sheet to help raise awareness among broker-dealers, investment advisers, and transfer agents of the Senior Safe Act (the “Act”) and how the Act’s immunity provisions work. The fact sheet was published in observation of the one-year anniversary of the Act, which was included as Section 303 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The fact sheet provides information on the immunity and training provisions of the Act, as well as additional resources from the SEC, NASAA, and FINRA. According to the SEC’s press release, “the immunity established by the Act is provided on the condition that employees receive training on how to identify and report exploitative activity against seniors before making a report.” In addition, reports of suspected exploitation must be made “in good faith” and “with reasonable care.”
OCC Publishes Report Highlighting Key Risks for the U.S. Federal Banking System
On 20 May, the OCC published a report entitled “Semiannual Risk Perspective for Spring 2019,” which highlighted the key risks for the U.S. federal banking system. The report concluded that in general the condition of the federal banking system is strong and that “[w]hile U.S. economic growth is widely expected to slow in 2019, the economic environment is expected to support loan growth and bank profitability for the remainder of the year.” Specifically, the report found that: (i) “[c]redit quality is strong when measured by traditional performance metrics like delinquencies, problem loans, and loan losses,” although the OCC continued to remind bankers and examiners to “assess the quality and timeliness of credit risk identification, risk mitigation, and loan loss reserve methodology”; (ii) operational risk is high as banks “adapt to a changing and increasingly complex operating environment,” such as from “persistent cybersecurity threats as well as innovation in financial products and services, and increasing use of third parties to provide and support operations”; (iii) “[c]ompliance risk related to Bank Secrecy Act/anti-money laundering . . . remains high”; and (iv) low-interest rates and related liquidity risk continue to pose significant challenges.
Fed Chair Powell Delivers Speech on Increases in Business Debt
On 20 May, Fed Chair Jerome Powell delivered a speech regarding the risks associated with the current increase in corporate debt over the past decade. Chair Powell contrasted the current environment to that of the subprime mortgage crisis in 2008 and stated that “as of now, business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate.” He warned, however, that the “level of debt certainly could stress borrowers if the economy weakens” due to a number of factors, including: (i) corporate debt at “historic highs” relative to the size of the economy; (ii) the size of corporate debt relative to the book value of assets; and (iii) a sizable shift towards non-investment-grade or riskier debt issued primarily by nonbank lenders. Despite these risks, Powell noted that “financial authorities now closely monitor financial stability vulnerabilities on an ongoing basis” and that there have been significant improvements to the resilience of the economy, such as increased capital buffers for banks and more frequent and thorough stress testing.
Fed and FOMC Release FOMC Meeting Minutes for March 19-20
On 22 May, the Fed and its Federal Open Market Committee (“FOMC”) released the minutes for the FOMC meeting held on 30 April – 1 May 2019. Among other things, the meeting participants: (i) agreed that “labor markets had remained strong over the intermeeting period and that economic activity had risen at a solid rate”; (ii) expressed concern that “if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the Committee’s symmetric 2 percent objective”; and (iii) cautioned that “[i]n light of global economic and financial developments as well as muted inflation pressures…a patient approach to determining future adjustments to the target range for the federal funds rate remained appropriate.” In addition, the FOMC voted to: (i) lower the interest rate paid on required and excess reserve balances from 2.40 to 2.35 percent, effective May 2, 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.
o May 30: Treasury Secretary Mnuchin will preside over an executive session of the FSOC to discuss U.S. nonfinancial corporate credit, public comments submitted regarding proposed amendments to the Council’s interpretive guidance on nonbank financial company designations, and equity market structure.
o May 31: The SEC’s Strategic Hub for Innovation and Financial Technology (“FinHub”) will host a forum on distributed ledger technology and digital assets.
o May 31: Comments are due on the CFTC’s interim final rule granting uncleared swaps "legacy status" for a "No-deal Brexit.”
o June 4: Senate Banking Committee to hold hearing on “Confronting Threats from China: Assessing Controls on Technology and Investment, and Measures to Combat Opioid Trafficking.
o June 5: Senate Banking Committee to hold nomination hearing on: Treasury, Commerce Department, Fed, Export-Import Bank, and SEC nominations.
o June 12: The OCC will host a Minority Depository Institutions Advisory Committee Meeting to discuss the continued health and viability of minority depository institutions and other issues of concern to these institutions.