US Regulatory Research
DOJ Issues Guidance Regarding the Evaluation of Corporate Compliance Programs
On 30 April, the Criminal Division (“Division”) of the US Department of Justice (“DOJ”) published an updated Evaluation of Corporate Compliance Programs Guidance Document (“the Guidance”) building on the Division’s Fraud Section’s 2017 guidance on the same topic. The Guidance, which will now apply to the entire Criminal Division rather than just the Fraud Section, was established for prosecutors to use in evaluating corporate compliance programs. In that regard, the Guidance identifies three “fundamental questions” that a prosecutor should ask: (i) whether “the corporation’s compliance program [is] well designed”; (ii) whether “the program [is] being applied earnestly and in good faith”; and (iii) whether “the corporation’s compliance program work[s] in practice.” The Guidance emphasizes the importance of tailoring a company’s compliance program to evolving risks on an ongoing basis, noting that prosecutors should consider “revisions to corporate compliance programs in light of lessons learned.” Specifically, the Guidance encourages prosecutors to consider whether companies track and analyze information from internal reporting, to what extent companies have conducted a gap analysis or updated risk assessments, and whether investigations have been used to identify “root causes, system vulnerabilities, and accountability lapses.”
Treasury’s OFAC Issues Framework for Compliance Commitments
On 2 May, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) published a document entitled “A Framework for OFAC Compliance Commitments,” which offers guidance for the development of strong programs for compliance with U.S. economic sanctions. The framework, which is aimed at organizations subject to U.S. jurisdiction and foreign entities that conduct business in or with the U.S., addresses: (i) the fundamental aspects of a strong sanctions compliance program; (ii) how OFAC evaluates potential violations; and (iii) ten common “root causes” of U,S, sanctions violations. In particular, OFAC identified that the misinterpretation, or failure to understand the applicability of, OFAC regulations is a leading root cause of U.S. economic sanctions violations. OFAC noted, for example: “several organizations have failed to appreciate or consider (or, in some instances, actively disregarded) the fact that OFAC sanctions applied to their organization based on their status as a U.S. person, a U.S.-owned or controlled subsidiary (in the Cuba and Iran programs), or dealings in or with U.S. persons, the U.S. financial system, or U.S. origin goods and technology.”
Nine Democratic Senators Send Letter to CFPB Director Kraninger Regarding Removal of Certain Technology from CFPB Website
On 29 April, nine Democratic Senators sent a letter to Consumer Financial Protection Bureau (“CFPB”) Director Kathy Kraninger expressing their disapproval of decision to “remove Home Mortgage Disclosure Act (“HMDA”) Explorer and the Public Data Platform Application Programming Interface that runs it from the CFPB website.” The Senators argued that this technology was critical to providing the public access to mortgage data, which the Senators claimed was the purpose of the HDMA.
Senate Banking Committee Holds Hearing on Supervisory Guidance and the Rule of Law
On 30 April, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) held a hearing entitled “Guidance, Supervisory Expectations, and the Rule of Law: How do the Banking Agencies Regulate and Supervise Institutions?” Testifying at the hearing were: Greg Baer, President And Chief Executive Officer, Bank Policy Institute; Margaret Tahyar, Partner, Davis Polk & Wardwell LLP; and Patricia McCoy, Professor Of Law, Boston College Law School. Baer focused on how “legal process has broken down in the regulation and examination of banks,” and specifically on “a process that has prevented stakeholders in banking policy – not only banks but also their customers, academics, and even Members of Congress – from learning what many of those requirements are, and having a say in their content.” Tahyer made three recommendations regarding bank supervision: (i) “the regulations governing confidential supervisory information need to be modernized”; (ii) “[s]ensible guardrails are needed so that supervision does not make economic and social policy choices that impact credit, jobs, and growth in an ad hoc manner free from oversight”; and (iii) “Congress and the baking agencies need to think clearly about how to create an environment where the supervisory staff are given the training, resources and tools that would permit them to do their jobs in a way that is more transparent to the world, where there is more accountability and where there is more consistency with the rule of law.” McCoy’s testimony centered on the reasons why he thinks it would be “badly misguided” to institute “changes that would require non-binding agency guidances to undergo notice-and-comment proceedings and Congressional Review Act oversight.”
House Passes Three Financial Services Measures
On 30 April, the U.S. House of Representatives passed three financial services measures:
o H. Res. 327, a resolution “[e]ncouraging greater public-private sector collaboration to promote financial literacy for students and young adults”;
o H.R. 1876, a bill that would “create an interdivisional taskforce at the Securities and Exchange Commission for senior investors;” and
o H. Res. 328, a resolution supporting continued education and cooperation among various institutions to “combat elder financial exploitation.”
House Financial Services Subcommittee Holds Hearing on Payday and Small Dollar Credit Industry
On 30 April, the U.S. House Committee on Financial Services’ (“House Financial Services Committee”) Subcommittee Consumer Protection and Financial Institutions held a hearing entitled “Ending Debt Traps in the Payday and Small Dollar Credit Industry.” The hearing highlighted several legislative actions Congress “could consider to provide additional protections to consumers and to promote responsible short-term lending products,” including draft legislation that “would impose a 36 percent usury APR cap for all open-end and closed-end consumer credit transactions, including mortgages, car loans, overdraft loans, car title loans, and payday loans.”
House Financial Services Subcommittee Holds Hearing on Diversity and Inclusion
On 1 May, the House Financial Services Committee’s Subcommittee on Diversity and Inclusion held a hearing entitled “Good for the Bottom Line: A Review of the Business Case for Diversity and Inclusion.” Testifying at the hearing were: Rick Guzzo, Senior Leader, Workforce Strategy, Mercer; Victoria Budson, Co-Director, Women and Public Policy Program, Kennedy School, Harvard University; Adrienne Trimble, President, National Minority Supplier Development Council; William Von Hoene, Jr., Chief Strategy Officer, Exelon; and Rory Verrett, Founder and Managing Partner, Protégé Search. Guzzo testified that the evidence on this issue… “is that the relationship between Board diversity and financial results ranges from nonexistent to very slightly positive at best.” Von Hoene stated that “In the six years since [the company began measuring diversity], we have increased diversity in our workforce from 34 percent to 41 percent and that “the company’s total shareholder return has increased 120 percent.” Budson highlighted the small percentage (20%) of women in senior leadership positions in the U.S. financial services industry and testified that “numerous research studies form the last few decades show that diversity in teams leads to better performance, and that heterogeneous teams solve complex problems and catch errors more effectively than homogenous teams.” Trimble said, “diversity and inclusion strategies make good business more profitable, more efficient, and more of a factor in every aspect of American life. They have a clear, measurable to a corporation’s bottom line.” Verrett explained that diversity and inclusion help companies (i) “become the fullest, most successful version of themselves as enterprises,” (ii) “outperform their competitors,” and (iii) “better solve the problems they face.”
SEC & Securities
SEC Issues Bulletin Alerting Investors to “Beware of Claims That the SEC Has Approved Offerings”
On 30 April, the Securities and Exchange Commission’s (“SEC”) Office of Investor Education and Advocacy issued an investor alert “to warn investors of misrepresentations about SEC ‘approvals’ of offerings.” The alert clarified that “the SEC never ‘approves’ an offering” was issued in light of recent situations “in which sponsors of [initial coin offerings] have allegedly touted SEC forms and filings as indications that the investment has been ‘approved’ by the SEC.” The alert provided a high-level overview of select EDGAR filings, including Form D, Form 1-A, and Form C. The alert noted: “While the SEC staff reviews certain forms and filings for compliance with disclosure obligations, the SEC does not evaluate the merits of any offering nor does it determine if any securities offered are ‘good’ investments.”
SEC’s Office of the Advocate for Small Business Capital Formation Announces May 6 Roundtable
On 30 April, the SEC’s Office of the Advocate for Small Business Capital Formation announced that it will host a roundtable on 6 May to hear from small businesses and their investors in celebration of National Small Business Week.
SEC Chief Accountant Delivers Remarks Before 2019 Baruch College Financial Reporting Conference
On 2 May, SEC Chief Accountant Wesley Bricker delivered remarks before the 2019 Baruch College Financial Reporting Conference in a speech entitled “Aiming toward the future.” Bricker addressed several areas that the SEC is focused on with respect to financial reporting, including: (i) attracting talent to the accounting profession and promoting integrity within the profession; (ii) new Generally Accepted Accounting Principles (“GAAP”) oriented to the needs of investors, which are currently “at various stages of implementation”; (iii) “integrity and consistency in the non-GAAP and key operational figures”; (iv) efforts to promote and enforce requirements for the maintenance of effective Internal Controls over Financial Reporting; (v) amendments to auditor independence rules and standards, specifically those applicable when the auditor has a lending relationship with certain shareholders of an audit client, for which the SEC plans to issue final rules in 2019; (vi) the Public Company Accounting Oversight Board’s work to regulate auditors; (vii) the governance responsibilities of independent directors or independent advisory council members of large U.S. audit firms; (viii) communication between the independent audit committees of public companies and investors; (ix) international cooperation to promote audit quality; and (x) the role of technology, data, and innovation in financial and business reporting.
SEC Names New Co-Chief of Asset Management Unit
On 2 May, the SEC announced that Adam Aderton has been named Co-Chief of the Division of Enforcement’s Asset Management Unit (“the Unit”), which is a national specialized unit that focuses on misconduct by investment advisers, investment companies, and private funds. Aderton has been with the Unit since its inception in 2010, serving as its Assistant Director since 2013.
SEC Proposes Rule Amendments to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses
On 3 May, the SEC approved a proposed rule regarding the financial information provided to investors in connection with mergers and acquisitions. The proposal stems from the SEC’s ongoing comprehensive evaluation of disclosure requirements. The proposed rule is intended to: (i) improve for investors the financial information about acquired and disposed businesses; (ii) facilitate more timely access to capital; and (iii) reduce the complexity and cost to prepare the disclosure. The proposed changes would, among other things: (i) update significance tests under the relevant rules by revising the investment test and the income test, “expanding the use of pro forma financial information in measuring significance, and conforming the significance threshold and tests for a disposed business”; and (ii) reduce the number of fiscal years that acquired businesses’ financial statements are required to cover.
o On 3 May, SEC Commissioner Robert Jackson issued a statement expressing concerns regarding the proposed rule. Specifically, Jackson stated: “The proposal provides several necessary updates to our rules. But I’m concerned that the proposal treats mergers as an unalloyed good – ignoring decades of data showing that not all acquisitions make sense for investors.” Jackson highlighted two examples where the “proposal ignores evidence on how corporate insiders use mergers to extract private benefits at investor expense” in the context of: (i) proposed revisions to significance tests to determine a deal’s significance based upon the market value of the acquirer’s equity; and (ii) the proposal’s economic analysis, which he believes “reflects a troubling trend of one-sided thinking in our rulemakings” by failing to acknowledge that “mergers also come with substantial agency costs.”
CFTC & Derivatives
CFTC Approves Proposed Amendments to DCO Regulations
On 29 April, the Commodity Futures Trading Commission (“CFTC”) approved a proposed rule to amend its regulations regarding derivatives clearing organization (“DCO”) general provisions and core principles. The proposal represents the results of the CFTC’s efforts to “address questions regarding interpretation and implementation of various requirements” since the regulations were first introduced. The proposed rules would, among other things: (i) streamline the registration and reporting process for DCOs; (ii) address certain risk management and reporting obligations; and (iii) introduce new requirements with respect to “default procedures and event-specific reporting in response to recent events.”
o On 29 April, CFTC Commissioner J. Christopher Giancarlo issued a statement expressing his support for the proposal, noting that the changes were proposed in line with the CFTC’s Project KISS initiative. Giancarlo stated his belief that “revisions will improve the clarity of the text, codify staff relief and guidance, and simplify processes for registration or reporting.” He also emphasized that “new requirements with respect to default procedures and reporting in response to more recent events, such as the launch of bitcoin futures contracts and the Nasdaq Clearing default.”
o On 29 April, CFTC Commissioner Dan Berkovitz issued a statement regarding the proposed rule, saying that while the proposal “will help clarify and provide explicit rules for clearing organizations that provide a vital service to derivatives markets,” it includes “changes to the regulations that merit scrutiny.” Specifically, Berkovitz welcomed feedback regarding: (i) new DCO governance requirements that “set out only general principles and do not provide specific guidance or prescriptive standards”; (ii) the lack of specific guidance regarding how initial margin should be calculated in accordance with the proposed standard; and (iii) the inclusion of explicit procedures and requirements in the proposal regarding multi-entity cross-margining. He also expressed concern that the proposed mechanism for Commission review of certain DCO rule sets “may not provide sufficiently robust review procedures or the Commission with adequate authority to require a DCO to mitigate risks arising from the proposed actions.”
CFTC Commissioner Behnam Issues Letter Regarding Diversity and Inclusion at the CFTC
On 30 April, CFTC Commissioner Rostin Behnam issued a letter regarding diversity and inclusion in the CFTC workforce. Behnam wrote: “The CFTC’s Equal Opportunity Employer & Diversity Statement recognizes that workplace diversity and inclusion are critical to the agency’s success, and espouses a commitment to supporting the recruitment and maintenance of a truly diverse CFTC workforce. Current data suggest that the Commission may be falling short on those commitments, and in turn, undermining the agency’s success. This is especially true with respect to management level positions.”
CFTC Issues Clearinghouse Supervisory Stress Test Report
On 1 May, the CFTC issued a report regarding the results of two analyses: (i) a reverse stress test of central counterparties (“CCP”) resources and (ii) an analysis of stressed liquidation costs. The CFTC’s reverse stress test analysis was designed to identify combinations of market shocks that would consume pre-funded resources (i.e., defaulting clearing members’ initial margin, CCP committed capital, and guaranty fund). The market shocks tested were based on four extreme historical dates, including one scenario that involved market shocks five times the size of those sustained in the day following Lehman Brothers’ bankruptcy announcement. The results of this test indicated that the two tested CCPs (CME Clearing and LCH Ltd) “would have sufficient pre-funded resources to cover losses even if all [clearing members] with losses defaulted under certain extreme historic 1-day scenarios.” The report’s analysis of liquidation margin add-ons was designed “to test whether there would have been sufficient pre-funded resources available if the actual costs of hedging and auctioning the portfolio of a defaulting member exceeded CCP estimates.” It found that “pre-funded resources would have been sufficient to cover extreme but plausible market losses plus liquidation expenses for two house accounts even if the actual liquidation costs were double the amount of the liquidation margin add-on.” The CFTC stated that both tests did not include the adequacy of assessment powers triggered by an exhaustion of pre-funded resources.
CFTC Chairman Giancarlo Testifies Before House Agriculture Subcommittee on Commodity Exchanges, Energy and Credit
On 1 May, CFTC Chairman Giancarlo delivered testimony before the U.S. House Committee on Agriculture’s Subcommittee on Commodity Exchanges, Energy and Credit. During his remarks, Giancarlo addressed numerous topics, including the CFTC’s: (i) renewed focus on agricultural commodity futures; (ii) role as a “21st century regulator”; (iii) enforcement activities and priorities; (iv) economic modeling and econometric capabilities; (v) Dodd-Frank rulemaking efforts; (vi) swap execution facility (“SEF”) reforms; (vi) plans for increased examinations of clearing houses; (vii) promotion of effective international engagement; (viii) plans to improve cybersecurity; and (ix) Project KISS and agency reform. With respect to enforcement, Giancarlo noted the CFTC’s emphasis on “providing incentives for companies and individuals to engage in ethical corporate behavior . . . [and] providing incentives for self-reporting and cooperation.” Giancarlo addressed the CFTC’s commitment to finalizing Dodd-Frank rulemaking, remarking: “I intend to put forth . . . a position limits rule proposal before the end of the second quarter of this year.” He also discussed issues related to domestic and international regulatory harmonization, expressing his hope that the CFTC’s proposed SEF reform will “increase the chance that the SEC will draw on the new framework in whole or in part for their security-based SEF regime” and recalling recent efforts by the CFTC and the UK’s Financial Conduct Authority to provide regulatory certainty to market participants in the context of derivatives trading and clearing activities following Brexit. Giancarlo also shared his intent to put before the Commission “a rule proposal to address the registration of non-U.S. CCPs clearing swaps for U.S. persons . . . [and] a rule proposal addressing the registration and regulation of non-U.S. swap dealers and major swap participants” before leaving the CFTC. Finally, he emphasized the CFTC’s plans to improve cybersecurity in the coming year, including by “strength[ening] cybersecurity and network defenses . . . and invest[ing] in the agency’s multi-year cloud strategy.”
CFTC Chairman Giancarlo Publishes Letter to Fed Vice Chairman Concerning Phase Five Implementation
On 2 May, CFTC Chairman Giancarlo sent a letter to the Vice Chairman for Supervision of the Federal Reserve Board (“Fed”), Randal Quarles, concerning “Phase Five” implementation requirements for initial margin on uncleared swaps, scheduled for September 2020. Giancarlo’s letter included two recommendations based on the results of the CFTC’s data analysis regarding Phase Five implementation, particularly regarding the applicability of such requirements to small market participants. Noting that many entities with notional amounts greater than $8 billion and calculated initial margin amounts less than $50 million “will soon be required to incur the expenses of preparing to exchange initial margin even though they will never actually be required to exchange margin,” Giancarlo recommended that “US regulators issue guidance clarifying that an entity need not make any preparations to exchange initial margin on uncleared swaps so long as its calculated margin amount is less than the current initial margin threshold of $50 million.” He also recommended that “Global regulators commit to further engagement with [the Basel Committee on Banking Supervision and the International Organization of Securities Commissions] to reflect in global principles its recent confirmation that the implementation framework does not specify documentation, custodial or operational requirements if the bilateral initial margin amount does not exceed the framework's €50 million initial margin threshold.”
Fed Requests Comments on Proposal to Apply Netting Protections to Broader Range of Financial Institutions
On 3 May, the Fed requested comments on a proposal to amend Regulation EE to apply netting provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) to certain new entities. Regulation EE currently includes an activities-based test under which an entity can qualify as a financial institution for purposes of FDICIA’s netting provisions if the entity is a market intermediary and, during the previous 15-month period, it engaged in financial contracts exceeding specified numerical thresholds. The proposal would expand the definition of financial institutions to ensure that certain entities qualify as financial institutions, including: (i) swap dealers and security-based swap dealers; (ii) major swap participants and major security-based swap participants; (iii) nonbank systemically important financial institutions; (iv) certain financial market utilities; (v) foreign banks; (vi) bridge institutions; and (vii) Federal Reserve Banks. The proposal would also clarify how the existing activities-based test in Regulation EE applies following a consolidation of legal entities. Comments on the proposed amendments are due 60 days after their publication in the Federal Register.
Fed and FOMC Issue Press Release Regarding Monetary Policy Implementation
On 1 May, the Fed issued a press release regarding the Fed’s adoption of the monetary policy stance announced by its Federal Open Market Committee (“FOMC”) on 1 May 2019. Among other things, the Fed: (i) voted unanimously to set the interest rate paid on required and excess reserve balances at 2.35 percent, effective 2 May 2019; (ii) maintained the target range for the federal funds rate at 2-1/4 to 2-1/2 percent; (iii) instructed the Open Market Desk at the Fed to roll over at auction the amount of principal payments from the Fed’s holdings of Treasury securities maturing during each calendar month that exceeds $15 billion; and (iv) approved the establishment of the primary credit rate at the existing level of 3.00 percent.
Fed Vice Chair Clarida Delivers Speech on Economic Models and Monetary Policy
On 3 May, Fed Vice Chair Richard H. Clarida delivered a speech before the Hoover Institution Monetary Policy Conference on Strategies for Monetary Policy regarding the ways that economic models and financial market signals help him think about the practical implementation of monetary policy. Clarida began by describing the history and evolution of professional thinking towards monetary policy that lead to a discussion on how the FOMC considers “potential policy rate paths implied by a number of policy rules.” He noted that in practice (i) many key inputs to this assessment “are unobservable and must be inferred from data via models,” and (ii) the “true model of the economy is unknown, either because the structure is unknown or because the parameters of a known structure are evolving.” As such, policymakers must look to a number of sources for information regarding the determination of which policies to implement, including, among other things: (i) interest rate futures and interest rate swaps markets; (ii) the Treasury yield curve; and (iii) quotes from the Treasury Inflation-Protected Securities. He then concluded that as the structure of the economy evolves, “the policy framework must be – and I believe, at the Federal Reserve, is -- nimble enough to respect this evolution.”
CFPB Proposes Changes to HMDA Rules
On 2 May, the CFPB issued a Notice of Proposed Rulemaking to raise the coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under the HMDA rules. It also issued an ANPR seeking information on the costs and benefits of reporting certain HMDA data points.
o May 7: Comments are due on the CFPB’s ANPR regarding “Residential Property Assessed Clean Energy Financing.”
o May 7: The Senate Banking Committee will hold a hearing entitled “Privacy Rights and Data Collection in a Digital Economy.”
o May 8: House Financial Services Committee will hold a markup.
o May 8: House Financial Services Committee’s Subcommittee on Housing, Community Development and Insurance will hold a hearing entitled “A Review of the State of and Barriers to Minority Homeownership.”
o May 8: CFTC Chairman Giancarlo and Commissioners Behnam, Berkowitz, Quintenz, and Stump will participate in FIA’s 41st Annual Law & Compliance Division Conference.
o May 9: The SEC will hold an open meeting to consider: (i) certain rule amendments and interpretive guidance regarding the cross-border application of certain security-based swap requirements and (ii) amendments to the “accelerated filer and large accelerated filer definitions.
o May 15: CFTC Commissioner Stump will address the ICI Global Trading & Markets Committee and Derivatives Markets Advisory Committee.