US Regulatory Research
Senate Banking Committee Holds Hearing on Reauthorization of the Terrorism Risk Insurance Program
On 18 June, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) held a hearing entitled “The Reauthorization of the Terrorism Risk Insurance Program.” Testifying at the hearing were: Tarique Nageer, Terrorism Placement and Advisory Leader, Property Practice, Marsh; Howard Kunreuther, Co-Director, Wharton Risk Management and Decision Processes Center; and Baird Webel, Specialist in Financial Economics, Congressional Research Service. Nageer discussed: (i) Marsh’s 2019 terrorism risk insurance report; (ii) the current state of the terrorism insurance market; (iii) the impact the Terrorism Risk Insurance Act (“TRIA”) TRIA has on the availability and affordability of worker’s compensation insurance; and (iv) the implications of The Terrorism Risk Insurance Program’s not being reauthorized or being reauthorized too close to its expiration date. Kunreuther posed four questions he felt should be considered with regards to the renewal of TRIA: (i) what are the current risk sharing arrangements; (ii) who bears the cost of losses form a future terrorist attack; (iii) how well are commercial firms protected against TRIA losses through private insurance; and (iv) what modifications to current public-private partnerships should be considered. Webel provided a background on terrorism insurance, both pre- and post-TRIA, and discussed comparisons of previously enacted terrorism insurance laws. Webel highlighted the importance of TRIA, stating Congress needs to “reauthorize the program, to give the private market additional time to face the terrorism and – the threat of terrorism losses.”
Senate Confirms Nominations to SEC, HUD, and Treasury
On 20 June, the U.S. Senate confirmed the following nominations:
Allison Herren Lee to be a Member of the Securities and Exchange Commission for a term expiring June 5, 2022.
Bimal Patel to be an Assistant Secretary of the Treasury.
Seth Daniel Appleton to be an Assistant Secretary of Housing and Urban Development.
Robert Hunter Kurtz to be an Assistant Secretary of Housing and Urban Development.
House Financial Services Subcommittee Holds Hearing on Recent Trade Policies
On 19 June, The U.S. House Committee on Financial Services’ (“House Financial Services Committee”) Subcommittee on National Security, International Development, and Monetary Policy held a hearing entitled “Promoting Economic Growth: Exploring the Impact of Recent Trade Policies on the U.S. Economy.” Testifying at the hearing were: Laura Baughman, President, The Trade Partnership; C. Fred Bergsten, Senior Fellow and Director Emeritus, Peterson Institute for International Economics; John Boyd, President, National Black Farmers Association; Ronnie Russell, Member of Board of Directors, American Soybean Association; and Gordon Gray, Director of Fiscal Policy, American Action Forum. Baughman discussed ways that important restrictions affect economies and how the current state of tariffs has been affecting consumers and companies. Bergsten stated his opinion on the Trump Administration’s trade policies and urged Congress “to rein in the excesses of the Executive Branch.” Boyd testified that tariffs were hurting farmers and requested bipartisan legislation to help small-scale farmers. Russell testified about how tariffs have resulted in “punitive retaliatory tariffs on U.S. exports, particularly agriculture products,” which are hurting the soybean industry. Russell also recommended lifting U.S. tariffs to increase imports of soy to other countries. Gray’s testimony focused on three key points: (i) recent economic growth has outperformed, reflecting the significance of pro-growth policies; (ii) the Tax Cuts and Jobs Act has improved the investment climate in the United States; and (iii) reducing global trade barriers and expanding markets should be pursued when possible.
House Financial Services Subcommittee Holds Hearing on Enforcement of Securities Law Violations
On 19 June, the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets held a hearing entitled “Putting Investors First: Examining Proposals to Strengthen Enforcement Against Securities Law Violators.” Testifying at the hearing were: Jordan Thomas, Partner, Labaton Sucharow; Urska Velikonja, Professor of Law, Georgetown University Law Center; Andrew Vollmer, Professor of Law, University of Virginia School of Law; and Stephen Crimmins, Partner, Murphy & McGonigle PC. The hearing examined the following eight legislative proposals “designed to bolster regulators’ enforcement tools against securities law violators”:
o H.R. ___ the Holding Foreign Companies Accountable Act [draft];
o H.R. ___ the Stronger Enforcement of Civil Penalties Act of 2019 [draft];
o H.R. ___ a bill to establish a whistleblower program at the Public Company Accounting Oversight Board [draft]
o H.R. ___ the PCAOB Enforcement Transparency Act of 2019 [draft];
o H.R. ___ a bill to amend the Securities Exchange Act of 1934 to allow the Securities and Exchange Commission (“SEC”) to seek and Federal courts to grant restitution to investors and disgorgement of unjust enrichment [draft];
o H.R. ___ the Corporate Management Accountability Act of 2019 [draft];
o H.R. ___ a bill to establish a statute of limitations for certain actions of the Securities and Exchange Commission [draft]; and
o H.R. ___ the Bad Actor Disqualification Act of 2019 [draft].
Thomas expressed support for all of the bills but noted that the most critical one is “restoring the SEC’s ability to obtain full disgorgement of ill-gotten gains from wrongdoers.” He also emphasized the importance of the bill to strengthen the SEC’s civil monetary penalty authority. Velikonja discussed the importance of Congress’ codifying the SEC’s ability to seek disgorgement in court cases in light of Kokesh v. SEC. He also supported the draft bill that would extend the statute of limitations period for civil monetary claims. Crimmins also noted that defining disgorgement as a penalty in Kokesh v. SEC has created a big problem and urged the Subcommittee to adopt a uniform statute of limitations for SEC enforcement of three years following reasonable discovery of conduct but no more than 10 years from the actual event. Vollmer noted that the Public Company Accounting Oversight Board (“PCAOB”) transparency bill is too narrow and proposed alternative solutions. He also urged the need for SEC enforcement to improve procedures for discovering misconduct earlier and shorten the length of investigations rather than Congress making any adjustments to the statute of limitations period.
Senate Judiciary Committee Holds Hearing on Combating Kleptocracy
On 19 June, the U.S. Senate Committee on the Judiciary (“Senate Judiciary Committee”) held a hearing entitled “Combating Kleptocracy: Beneficial Ownership, Money Laundering, and Other Reforms.” Testifying at the hearing were: Clay Fuller, Jean Kirkpatrick Fellow, Foreign and Defense Policy Studies, American Enterprise Institute; Adam Szbubin, Distinguished Practitioner-In-Residence, Johns Hopkins School of Advances International Studies; Tom Firestone, Co-Chair, North American Government Enforcement Practice, Baker McKenzie; and Sheila Krumholz, Executive Director, Center for Responsive Politics. Fuller testified about the need to mitigate kleptocracy through economic transparency to produce benefits such as: (i) more effective economic sanctions enforcement; (ii) more efficient law enforcement in money-laundering cases; (iii) a more level playing field for American small businesses; (iv) decreased compliance costs for U.S. financial institutions; and (v) decreased perceptions of corruption in the United States. Szubin testified about the need to address the vulnerability that shell corporations pose to law enforcement. Firestone testified about the dangers of shell corporations, stating that “corruption prevents economic development and robs people of opportunity.” Finally, Krumholz testified about the need to have additional disclosure requirements for “opaque entities such as shell companies and LLCs” in order to protect democracy.
House Financial Services Committee Holds Hearing on Diversity in the Boardroom
On 20 June, the House Financial Services Committee held a hearing entitled “Diversity in the Boardroom: Examining Proposals to Increase the Diversity of America’s Boards.” Testifying at the hearing were: Chelsa Gurkin, Acting Director, Education Workforce and Income Security Team, U.S. Government Accountability Office; Luke Visconti, Founder and Chairman, Diversity Inc.; Ron Lumbra, Partner, Heidrick and Struggles; Linda Akutagawa, Chair, Alliance for Board Diversity; Stephanie Creary, Assistant Professor of Management, Wharton School of Business, University of Pennsylvania; and Ambassador Vilma Martinez. Gurkin testified about: (i) the extent of diversity on corporate and Federal Home Loan Bank boards; (ii) factors that hinder diversity on those boards; and (iii) strategies for increasing board diversity. Visconti testified about how a lack of diversity in the banking industry is “holding back our national GDP by denying equal access to finance, and as a result of poor workforce diversity, thwarting the innovation and talent needed to compete.” Lumba testified about obstacles inhibiting rapid progress on the diversity front, including: (i) low board turnover; (ii) demand for CEO experience; and (iii) board culture. He suggested a need for: (i) board effectiveness and flexibility; (ii) expanded leadership categories; and (iii) a comprehensive, process-oriented approach. Akutagawa testified that though there has been progress for women and minorities on corporate boards, there is still a need to work to increase this representation. Creary testified about the benefits of a diverse board, stating that “diversity doesn’t guarantee a better performing board and firm; rather, the culture of the board is what can affect how well diverse boards perform their duties and oversee their firms.” Finally, Martinez testified that “U.S. Latinos are an economic powerhouse for America’s businesses, yet, they remain an untapped asset in the corporate boardroom.”
Senate Banking Committee Holds Hearing on Collection of Beneficial Ownership Information
On 20 June, the Senate Banking Committee held a hearing entitled “Outside Perspectives on the Collection of Beneficial Ownership Information.” Testifying at the hearing were: Greg Baer, CEO, Bank Policy Institute; Karen Harned, Executive Director, Small Business Legal Center; and Gary Kalman, Executive Director, Financial Accountability and Corporate Transparence Coalition. Baer discussed the need for legislation to look behind the “corporate veil” of shell corporations. Baer suggested this legislation should: (i) require an individual who owns more than 25% of a company to disclose his or her name, address, date of birth, nationality, and unique identifying number (e.g. driver’s license or passport number); and (ii) establish a directory for corporate ownership. Harned testified that small businesses do not support the beneficial ownership bills, as they would “impose burdensome, costly, and intrusive requirements to file yet more reports with the government and threaten the constitutionally protected privacy rights of law-abiding small business owners.” Kalman expressed concerns over shell corporations, testifying about the importance of legislation to identify these corporations. He said that: (i) the reporting benefits outweigh burdens for small businesses; (ii) the information on businesses will be kept private; and (iii) there will be accountability for this legislation.
SEC & Securities
SEC Names Adam Glazer as Senior Advisor to the Director of the Division of Investment Management
On 17 June, the SEC announced that Adam Glazer has been named as the Senior Advisor to the Director of the Division of Investment. His work will focus on issues related to mutual funds and investment advisers. He joined the Division of Investment Management as an attorney in 2000 before becoming counsel to SEC Commissioner Michael Piwowar and subsequently counsel to SEC Commissioner Hester Peirce.
SEC Issues Request for Public Comment on Ways to Harmonize Private Securities Offering Exemptions
On 18 June, the SEC issued a request for public comment on ways to simplify, harmonize, and improve the exempt offering framework under the Securities Act of 1933. The SEC noted that over the years, several exemptions from registration have been introduced, expanded, or otherwise revised, leading to significant changes to the exempt offering framework. Consequently, the SEC believes that a revision of the framework would be beneficial for the capital markets, particularly addressing issues of consistency and complexities. Specifically, the SEC is requesting comments regarding whether the SEC should, among other things: (i) revise “[t]he limitations on who can invest in certain exempt offerings, or the amount they can invest”; (ii) “take steps to facilitate a company’s ability to transition from one offering to another or to a registered offering”; (iii) “expand companies’ ability to raise capital through pooled investment funds”; and (iv) “revise its exemptions governing the secondary trading of securities initially issued in exempt offerings.” Comments on the request are due within 90 days after the date of the request’s publication in the Federal Register.
The SEC also published a staff report on the impact of Regulation Crowdfunding on capital formation and investor protection, which examined the impact of the regulatory structure to raise capital through securities offerings via crowdfunding established by the Jumpstart Our Business Startups Act.
SEC Adopts Final Rule to Improve the Application of the Auditor Independence Rules to Loan Provisions
On 18 June, the SEC adopted a final rule that amends the auditor independence rules relating to the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client. In particular, the SEC notes that it has become aware over the past few years that, in certain circumstances, the existing definition of an independent auditor under Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Provision”) may have captured “relationships that otherwise do not bear on the impartiality or objectivity of the auditor.” Consequently, the amendments would amend the existing rules to focus on “the analysis on beneficial ownership rather than on both record and beneficial ownership,” such as by (i) “replac[ing] the existing 10 percent bright-line shareholder ownership test with a ‘significant influence’ test” and (ii) adding a “known through reasonable inquiry” standard with regards to identifying beneficial owners of the audit client’s equity securities. These amendments will become effective 90 days after they are published in the Federal Register.
SEC Announces Two Events for Main Street Investors in Boston
On 19 June, SEC Chairman Jay Clayton announced that the SEC will hold two events for main street investors in Boston on 8 July 2019: (i) a Main Street Investor Roundtable focusing on understanding key differences between broker-dealers and investment advisers, and (ii) a discussion by Chairman Clayton of the standards of conduct for financial professionals.
SEC Adopts Capital, Margin, and Segregation Requirements for SBSDs and MSBSPs and Amends the Capital and Segregation Requirements for Broker-Dealers
On 21 June, the SEC adopted a final rule establishing new rules and amending existing rules under Title VII of the Dodd-Frank Act relating to (i) Security-Based Swap Dealers (“SBSDs”) and Major Security-Based Swap Participants (“MSBSPs”) and (ii) broker-dealers. In particular, the final rule will: (i) “establish minimum capital requirements for [SBSDs] and [MSBSPs] for which there is not a prudential regulator (nonbank SBSDs and MSBSPs)”; (ii) “increase the minimum net capital requirements for broker-dealers that use internal models to compute net capital”; (iii) “establish capital requirements tailored to security-based swaps and swaps for broker-dealers that are not registered as an SBSD or MSBSP to the extent they trade these instruments”; (iv) “establish margin requirements for nonbank SBSDs and MSBSPs with respect to non-cleared security-based swaps”; (v) “establish segregation requirements for SBSDs and stand-alone broker-dealers for cleared and non-cleared security-based swaps”; and (vi) “amend the Commission’s existing cross-border rule to provide a means to request substituted compliance with respect to the capital and margin requirements for foreign SBSDs and MSBSPs” and “provide guidance discussing how the Commission will evaluate requests for substituted compliance.” The final rule will become effective 60 days after it is published in the Federal Register. The compliance date for the final rule is 18 months after the later of: (i) “the effective date of the final rules establishing recordkeeping and reporting requirements for SBSDs and MSBSPs”; or (ii) “the effective date of the final rules addressing the cross-border application of certain security-based swap requirements.”
CFTC & Derivatives
CFTC’s Bussey to Retire
On 19 June, the Commodity Futures Trading Commission (“CFTC”) announced the retirement of Brian Bussey, the Director of the Division of Clearing and Risk (“DCR”). Bussey has served as DCR director since 2017 and has worked as a federal employee for twenty-two years. Bussey’s main areas of focus were: (i) rethinking the CFTC’s approach to cross-border oversight of foreign central counterparties; (ii) applying CFTC rules to cryptocurrency derivatives and other FinTech-related initiatives; and (iii) enhancing the operations and management of the DCR.
Giancarlo Congratulates SEC on Adopting Final Rules Regarding SBSDs.
On 21 June, CFTC Chairman Christopher Giancarlo released a statement congratulating the SEC on the adoption of a rule imposing capital and segregation requirements for SBSDs and margin rules for uncleared security-based swap transactions. Giancarlo stated that this helps by “further providing a framework of an alternative compliance mechanism for non-broker-dealer entities that are registered as both swap dealers with the CFTC and security-based swap dealers with the SEC.”
Giancarlo’s Issues Statement on Basel Committee
On 20 June, CFTC Chairman Christopher Giancarlo issued a statement about the Basel Committee’s recommendations to exclude initial margin from the leverage ratio. Giancarlo stated, “The agreement addresses the current leverage ratio’s unfounded bias against cleared derivatives.” He “urge[d] prudential regulatory authorities to expeditiously implement [cleared derivatives] in their respective rules.”
Fed, FDIC, and OCC Issue Final Rule to Streamline Regulatory Reporting Requirements for Smaller Depository Institutions
On 17 June, the Federal Reserve (“Fed”), Federal Deposit Insurance Corporation (“FDIC”), and Office of the Comptroller of the Currency (“OCC”) issued a final rule to expand the categories of institutions that are eligible to file the agencies’ most streamlined report of condition, the FFIEC 051 Call Report. The agencies also announced that they are “actively committed to exploring additional revisions to Call Reports that would further reduce reporting requirement burdens.” The final rule implements Section 205 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which requires the agencies to issue regulations that “allow for a reduced reporting requirement for a covered depository institution” under certain circumstances, and would generally allow certain insured depository institutions with less than $5 billion in total consolidated assets that meet certain criteria to be able to use the FFIEC 051 Call Report for their reporting of condition.
OCC Publishes Quarterly Report on Bank Trading and Derivatives Activities for First Quarter of 2019
On 18 June, the OCC published its Quarterly Report on Bank Trading and Derivatives Activities for the first quarter of 2019. Among other things, the report stated that: (i) “[i]nsured U.S. commercial banks and savings associations … reported trading revenue of $10.0 billion in the first quarter of 2019, $5.9 billion more (141.0 percent) than in the previous quarter and $2.4 billion more (30.6 percent) than a year earlier”; (ii) “[c]redit exposure from derivatives decreased in the first quarter of 2019 compared with the fourth quarter of 2018”; (iii) “[d]erivative notional amounts increased in the first quarter of 2019 by $24.9 billion, or 14.1 percent, to $201.3 trillion; and (iv) “[d]erivative contracts remained concentrated in interest rate products, which totaled $149.2 trillion or 74.1 percent of total derivative notional amounts.”
Fed Issues FOMC Statement
On 19 June, the Fed issued a statement of its Federal Open Market Committee’s (“FOMC”) decisions regarding monetary policy implementation from its 18-19 June meeting. In the statement, the FOMC said that the “labor market remains strong and that economic activity is rising at a moderate rate” and that the FOMC had determined “to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.” Further, the FOMC said that it “continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased.” In light of these circumstances, the FOMC stated that it will “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.” In conjunction with its statement, the FOMC also released its economic projections and the target federal funds rate projections made by Federal FOMC participants. Last, the Fed unanimously voted to approve the establishment of the primary credit rate at the existing level of 3.00 percent.
Fed Governor Brainard Delivers Speech on Monetary Policy
On 21 June, Fed Governor Lael Brainard delivered a speech, entitled “Fed Listens in Cincinnati: How Does Monetary Policy Affect Your Community,” at the Federal Reserve Bank of Cleveland’s Policy Summit 2019. She began her speech by discussing the 18-19 June FOMC meeting, at which the participants shared their views on the economy and policy. Brainard stated that she continues to believe the “most likely path for the economy remains solid,” but that “[r]ecent weeks, however, have seen important downside risks … [that] could weigh on economic activity.” She then discussed three changes in macroeconomic relationships since the 2008 financial crisis -- changes 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. Last, she discussed some of the issues explored during the Fed’s 4-5 June 2019 research conference on monetary policy strategy, tools, and communication practices, including these issues: (i) the Fed making an “[explicit] promise to ‘make up’ for misses on inflation during a downturn” by” “hold[ing] interest rates lower after a recession is over, perhaps by promising not to raise interest rates until inflation or the unemployment rate have reached particular levels”; and (ii) the difficulty of “estimate[ing] with any precision the ‘maximum employment’ leg of [the Fed’s] dual mandate.”
Fed Publishes Results of Supervisory Bank Stress Tests
On 21 June, the Fed published the results of its latest supervisory Dodd-Frank Act stress tests (“DFAST”). The results showed that, among other things: (i) the 18 firms subject to the supervisory stress test have "strong capital levels that would allow them to stay well above their minimum requirements after being tested against a severe hypothetical recession”; (ii) “[a]ggregate losses at the 18 firms under the severely adverse scenario are projected to be $410 billion … [which] represent a slight decline from $464 billion for the same 18 firms in DFAST 2018” and are “well in line with loss rates in the 2015–17 stress test exercises”; and (iii) “[a]ggregate projected pre-provision net revenue in DFAST 2019 for the 18 firms under the severely adverse scenario is projected to be $327 billion, compared to $389 billion for the same set of firms in DFAST 2018.”
o June 25: The SEC will host its 2019 Compliance Outreach Program for Investment Advisers and Investment Companies.
o June 25: The Senate Banking Committee will hold a hearing titled “Should Fannie Mae and Freddie Mac be Designated as Systemically Important Financial Institutions?”
o June 25: The House Financial Services Committee’s Subcommittee on Diversity and Inclusion will hold a hearing titled “Diverse Asset Managers: Challenges, Solutions, and Opportunities for Inclusion.
o June 25: The House Financial Services Committee’s Task Force on Financial Technology will hold a hearing titled “Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation.
o June 25: The Senate Committee on Agriculture, Nutrition & Forestry will hold a hearing entitled “The State of the Derivatives Market and Perspectives for CFTC Reauthorization.”
o June 25: The House Financial Services Committee’s Subcommittee on Diversity and Inclusion will hold a hearing entitled “Diverse Asset Managers: Challenges, Solutions and Opportunities for Inclusion.”
o June 26: The House Financial Services Committee’s Task Force on Artificial Intelligence will hold a hearing titled “Perspectives on Artificial Intelligence: Where We Are and the Next Frontier in Financial Services.”
o June 26: The House Financial Services Committee will hold a markup.
o June 26: The House Agriculture Committee’s Subcommittee on Commodity Exchanges, Energy, and Credit will hold a hearing entitled “Brexit and Other International Developments Affecting U.S. Derivatives Markets.”
o June 27: The Senate Banking Committee will hold a hearing titled “Oversight and Reauthorization of the Export-Import Bank of the United States.”
o June 27: The Fed will release results from the latest Comprehensive Capital Analysis and Review.
o June 27: The SEC will host the 2019 National Compliance Outreach Program for Broker-Dealers.
o July 8: The SEC will hold a Main Street Investors Roundtable and Chairman Clayton will discuss the standards of conduct for financial professionals in Boston.