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US Regulatory Research

US Regulatory Updates

US Regulatory Research

General

Agencies Adopt Final Rule to Exclude Community Banks from Volcker Rule

On 9 July, the Securities and Exchange Commission (“SEC”), Commodity Futures Trading Commission (“CFTC”), Federal Reserve (“Fed”), Federal Deposit Insurance Corporation (“FDIC”), and Office of the Comptroller of the Currency (“OCC”) jointly adopted a final rule to exclude community banks from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act. The Volcker Rule introduced “prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds” and the final rule: (i) “exclude[s] from these prohibitions and restrictions certain firms that have total consolidated assets equal to $10 billion or less and total trading assets and liabilities equal to five percent or less of total consolidated assets”; and (ii) “revise[s] the restrictions applicable to the naming of a hedge fund or private equity fund to permit an investment adviser that is a banking entity to share a name with the fund under certain circumstances.”

U.S. Congress

House Financial Services Committee Holds Hearing on Monetary Policy and the State of the Economy

On 10 July, the U.S. House Committee on Financial Services (“House Financial Services Committee”) held a hearing entitled “Monetary Policy and the State of the Economy.”  Jerome Powell, Chairman of the Fed, testified at the hearing. In reviewing the economic outlook, Powell testified that “[t]he economy performed reasonably well over the first half of 2019 and the current expansion is now in its 11th year.” He noted that the labor market remains healthy, but that inflation is below the Fed’s 2 percent target. He cited trade developments, the federal debt ceiling, and Brexit as issues that have yet to be solved. Powell also described a first-of-its-kind public review of the Fed’s monetary policy, strategy, tools and communications that is currently underway. Several members asked Powell about Libra (Facebook’s proposed cryptocurrency), and he pointed to the creation of a Fed working group focused on privacy, money-laundering, consumer protection, and financial stability concerns. Powell said that he believes Libra should not go forward until these concerns are addressed. Additionally, regarding faster payments, Powell stated that the Fed was reviewing public comment letters and remains sensitive to the concerns of community banks. Those concerns include the interoperability between systems if the Fed decides to create a federal alternative to the private sector system. Powell expressed his view that a Fed faster payments system will not be finished by 2020, the deadline established by the Faster Payments Task Force. Other topics Powell fielded questions on included: LIBOR, the minimum wage, why inflation remains lower than expected, the impact of the deficit on interest rates, and the potential impacts of trade negotiations on the broader economy.

House Passes Financial Services Bills

On 10 July, the U.S. House passed the following resolution and bills offered by House Financial Services Committee members:

o    H. Res. 456, a bipartisan resolution emphasizing the importance of state security regulators;

o    H.R. 1988, the Protect Affordable Mortgages for Veterans Act of 2019;

o    H.R. 2162, the Housing Financial Literacy Act of 2019;

o    H.R. 2409, the Expanding Access to Capital for Rural Job Creators;

o    H.R. 2515, the Whistleblower Protection Reform Act of 2019;

o    H.R. 2919, the Improving Investment Research for Small and Emerging Issuers Act; and

o    H.R. 3050, the Expanding Investment in Small Business Act of 2019.

House Financial Services Subcommittee Holds Hearing on Proposals to Improve ESG Disclosures

On 10 July, the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets held a hearing entitled “Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures.” Testifying at the hearing were: Tim Mohin, Chief Executive, Global Reporting Initiative (“GRI”); James Andrus, Investment Manager-Financial Markets, Sustainable Investment, CalPERS Investment Office; Paul Atkins, Chief Executive Officer, Patomak Global Partners; Degas A. Wright,  Chief Executive Officer, Decatur Capital Management, Inc.; and Mindy Lubber, President and Chief Executive Officer, Ceres. The following draft bills were considered:

o    H.R.____, the ESG Disclosure Simplification Act of 2019 [DRAFT];

o    H.R.____, the Shareholder Protection Act of 2019 [DRAFT];

o    H.R.____, the Corporate Human Rights Risk Assessment, Prevention, and Mitigation Act of 2019 [DRAFT];

o    H.R.____, a bill to require issuers required to file an annual or quarterly report under the Securities Exchange Act of 1934 to disclose the total amount of corporate tax such issuer paid in the period covered by the report, and for other purpose [DRAFT]; and

o    H.R.____, the Climate Risk Disclosure Act of 2019 [DRAFT]. 

Mohin focused on the ESG Disclosure and Simplification Act, noting that it “can help protect investors, unlock free trade, reduce issuer burden and ultimately align capital with sustainable business practices.”

Andrus expressed support for all of the bills on behalf of CalPERS and said that CalPERS is a “reasonable investor.” Atkins focused on the cost of disclosure (including disclosure overload), the cost of going public, and the decline in initial public offerings in the U.S. He noted that while well-intentioned, “many of the bills set requirements already provided elsewhere in law at best” or would bring unintended consequences similar to those of past efforts. Wright explained why, as an investment manager, he believes that ESG disclosures such as the ones in the draft bills may provide material information. Lubber expressed support for all the bills, with a particular focus on sustainability, claiming that “since our founding 30 years ago, our members have consistently felt that sustainability challenges pose material financial risks and that these risks need to be embedded into our capital market systems.”

Senate Banking Committee Holds Semiannual Monetary Policy Report to Congress

On 11 July, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) held a hearing entitled “The Semiannual Monetary Policy Report to Congress.”  Jerome Powell, Chairman of the Fed, testified at the hearing. Similar to his hearing in the House Financial Services Committee the day before, Powell received questions about, among other subjects, Facebook’s Libra, the impact of the trade situation on the economy, the Fed’s real time payment efforts, leveraged lending, and Deutsche Bank. Regarding Libra, Powell said, “It isn't obvious at all from our current regulatory system that we have in place what we need to assess and provide oversight over this.” Regarding leveraged lending, Powell reiterated what he’s said in the past: that the Fed is “very focused on monitoring it and confirming that it doesn't evolve into something into that could threaten the system.” However, he did not express immediate concern about the issue. Powell was also asked about the Fed’s stress tests and responded that the Fed is “going to preserve the overall strength and power of them, while making them more transparent.”

House Financial Services Committee Holds Markup 

On 11 July, the House Financial Services Committee held a markup in which it advanced the following bills:

o   H.R. 281, the Ensuring Diverse Leadership Act of 2019, as amended (56-2);

o   H.R. 1018, the Improving Corporate Governance through Diversity Act of 2019, as amended (53-5);

o   H.R. 2852, the Homebuyer Assistance Act of 2019, as amended (voice vote);

o   H.R. 3279, the Diversity in Corporate Leadership Act of 2019, as amended (52-6);

o   H.R. 3614, the Restricting Use of Credit Checks for Employment Decisions Act, as amended (32-26);

o   H.R. 3618, the Free Credit Scores for Consumers Act of 2019, as amended (32-26);

o   H.R. 3619, the Appraisal Fee Transparency Act of 2019, as amended (voice vote);

o   H.R. 3620, the Strategy and Investment in Rural Housing Preservation Act of 2019, as amended (57-0); and

o   H.R. 3622, the Restoring Unfairly Impaired Credit and Protecting Consumers Act, as amended (32-26).

H.R. 3642, the Improving Credit Reporting for All Consumers Act, as amended (32-26).

SEC & CFTC

CFTC and SEC Invite Public Comments on a Joint Proposal Regarding Margin Requirements for Security Futures

On 9 July, the CFTC and the SEC announced they have approved a joint proposal “to align the minimum margin required on security features with other similar financial products.” The proposal calls for the minimum margin requirement to be reduced to 15 percent of the current market value, down from the current 20 percent. The agencies, in an effort to “harmonize their regulatory regimes for the benefit of investors and the markets,” seek public comments on the proposal.  

SEC & Securities 

SEC and FINRA Jointly Issue Statement on Broker-Dealer Custody of Digital Asset Securities

On 8 July, the SEC’s Division of Trading and Markets (“TM”) and the Financial Industry Regulatory Authority (“FINRA”) jointly issued a statement on broker-dealer custody of digital asset securities, particularly with regards to the SEC’s Customer Protection Rule applicable to SEC-registered broker-dealers. In their statement, TM and FINRA discussed the importance of the Customer Protection Rule and provided an overview of the requirements that the rule imposes. Noting that a large number of unregistered entities that are intending to engage in broker-dealer activities involving digital asset securities are seeking to register with the SEC and FINRA, TM and FINRA provided a number of considerations for the custody of digital asset securities. The considerations include those relating to: (i) the books and records and financial reporting rules; (ii) the application of the Securities Investor Protection Act of 1970 to digital assets; and (iii) the use of issuers or transfer agents as “control location” for purposes of the possession or control requirements under the Customer Protection Rule.

SEC Chairman Clayton Delivers Speech Defending Regulation Best Interest and the Investment Adviser Fiduciary Duty

On 8 July, SEC Chairman Jay Clayton delivered a speech regarding Regulation Best Interest (“Reg. BI”) and the investment adviser fiduciary duty. During his speech, Clayton first provided a summary of: (i) Reg. BI; (ii) the investment adviser fiduciary duty; (iii) the required information to be included in the Form CRS relationship summary; and (iv) the distinction between broker-dealer and investment adviser activities. Clayton then addressed a number of public criticisms aimed at the initiatives listed above, including stating that: (i) “Reg. BI substantially enhances the standard of conduct for broker-dealers” by “affirmatively requir[ing] broker-dealers to act in the best interest of their retail customers and not place their own interests ahead of the customer’s interests” and applying to “a series of recommended transactions … irrespective of whether a broker-dealer exercises actual or de facto control over a customer’s account”; (ii) the SEC considered carefully whether it should adopt a principle-based or prescriptive approach to implementing the new standards, and “[o]ur view was that the best approach would be to apply the specific component obligations of Reg. BI, including the ‘best interest’ requirement in the Care Obligation, in a principles-based manner”; (iii) “[o]ur Fiduciary Interpretation in no way weakens the existing fiduciary duty; rather, it reflects how the Commission and its staff have inspected for compliance, applied and enforced the law in this area for decades”; (iv) there is “no legal or regulatory basis for [the] claim [that] [t]he Fiduciary Interpretation weakens the existing fiduciary duty that applies to investment advisers by not requiring advisers to avoid all conflicts”; (v) “Reg. BI cannot be satisfied by disclosure alone” and the “general obligation is satisfied only if the broker-dealer complies with the four specified component obligations [of] … Disclosure, Care, Conflict of Interest and Compliance”; (vi) the SEC “do[es] not believe that it would be consistent with the solely incidental prong of the broker-dealer exclusion under the Advisers Act for a broker-dealer to agree to provide continuous monitoring of a customer account” as that “would subject the broker-dealer to regulation as an investment adviser”; and (vii) “[o]ur final relationship summary, which benefited from investor testing and commentary, is consistent with the original goals of the proposal—it will highlight key information in one place for retail investor.”

SEC Announces Meeting of Small Business Capital Formation Advisory Committee

On 9 July, the SEC announced that it will hold a meeting of its Small Business Capital Formation Advisory Committee on 13 August 2019. The agenda for the meeting has yet to be released.

The meeting will precede the SEC’s 38th Annual Government-Business Forum on Small Business Capital Formation, which will be held on 14 August 2019. The SEC will publish the agenda once it has been finalized. 

SEC Staff Issue Statement on LIBOR Transition

On 12 July, the SEC’s Division of Corporation Finance (Corp Fin”), Division of Investment Management (“IM”),  TM, and Office of the Chief Accountant (“OCA”) (collective the “Divisions”) jointly issued a statement on the transition of LIBOR to alternative reference rates. The Divisions note that there could be a discontinued use of or degradation of the reliability of LIBOR as a number of private-sector banks have indicated that they will stop reporting information used to establish LIBOR after 2021. Consequentially, the Divisions urge market participants who have not already done so to begin managing their transition away from LIBOR to alternative reference rates. To assist U.S. market participants and market participants subject to U.S. regulations in their transition, the Divisions’ statement provides guidance to market participants on factors they should consider as part of their transition process, including both generally with regards to existing contracts, new contracts entered into in the future, and other business risks, as well as and through division specific guidance relevant to the different institutions or topic areas overseen by each division.  

SEC Commissioner and Staff Announcements

On 8 July, Allison Herren Lee was sworn into office as an SEC Commissioner. She replaces Democrat SEC Commissioner Kara Stein and her term expires on 5 June 2022.

 On 9 July, the SEC announced that Julie Erhardt, Deputy Chief Accountant (Technology and Innovation) in OCA, plans to leave the SEC in July.

CFTC & Derivatives

CFTC Issues Report Regarding Swap Dealer De Minimis Exception

On 8 July, the CFTC’s Division of Swap Dealer and Intermediary Oversight (“DISO”) staff issued a report on the swap dealer de minimis exception, with a focus on on-venue and cleared swaps. The staff report highlighted two fundamental facts regarding the de minimis exception: (i) the removal of exchange-traded and cleared swaps from the de minimis calculation would result in no reduction of regulatory coverage, and (ii) there are glaring deficiencies in using notional value as the registration threshold triggering swap dealer registration. The report stems from a request made by CFTC Chairman J. Christopher Giancarlo on 5 November 2018 at a CFTC Open Meeting to “conduct a study on possible alternative metrics for the calculation of the swap dealer de minimis threshold.”

CFTC Commissioner Quintenz Issues Statement Regarding DSIO Staff Report

On 8 July, CFTC Commissioner Brian Quintenz issued a statement regarding the DISO staff report on the swap dealer de minimis exception. Quintenz stated the report was “a step in the right direction,” and he urged DISO to “continue their analysis of possible alternatives for the de minimis exception.”

CFTC Commissioner Dan Berkovitz Issues Statement on Proposed Amendments tor Security Futures Margin Requirements

On 9 July, CFTC Commissioner Dan Berkovitz issued a statement in support of the proposed amendments to customer margin rules for security futures.  Berkovitz said that decreasing the minimum margin from 20 percent to 15 percent “would increase consistency in the markets by bringing the margin requirement for security futures held outside of a securities portfolio margin account into alignment with the margining for securities futures under risk-based portfolio margining methodologies.” Berkovitz also stated that the proposal “represents an opportunity for the Commissions to gain more knowledge about the security futures markets, reevaluate the status quo, and establish a more effective regulatory standard.”

CFTC Issues Advisory Clarifying Initial Margin Threshold and Documentation Requirements

On 9 July, the CFTC’s DISO staff issued a staff advisory noting that “the CFTC’s uncleared swap margin rules do not require documentation governing the posting, collection, and custody of initial margin until the initial margin threshold amount exceeds $50 million.” This advisory was issued in furtherance of a March 2019 statement by the Basel Committee on Banking Supervision and the Internal Organization of Securities Commissions concerning initial margin implementation.

CFTC Announces Establishment of Climate-Related Market Risk Subcommittee

On 10 July, CFTC Commissioner Rostin Benham announced that the CFTC has voted to establish the Climate-Related Market Risk Subcommittee under the CFTC’s Market Risk Advisory Committee (“MRAC”). The subcommittee was established to “identify and examine climate change-related financial and market risks.”  Behnam invited the public to nominate members who are not already serving on the MRAC.

CFTC Issues Joint Staff Advisory for FCM Separate Account Practices

On 10 July, the CFTC’s DISO and Division of Clearing and Risk (“DCR”) staff issued a joint staff advisory interpretation and time-limited no-action relief letter “related to the treatment of separate accounts by futures commission merchants (“FCM”).” The advisory and no-action letter is related to “CFTC Regulation 1.56 and its prohibition on limited resource and FCM margining practices for customers with more than one futures account.”

CFTC Releases Videocast on the Impact of Manufactured Credit Events

On 10 July, the CFTC released an episode of its videocast, CFTC Talks, focused on the impact of manufactured credit events in the credit derivatives markets. The videocast features a variety of different CFTC members and “addresses the concerns raised by three senior regulators earlier this summer regarding ’opportunistic strategies,’ or more commonly known as ’manufactured credit events’ in the credit derivatives markets.”

CFTC Holds Open Meeting Regarding Proposed Rules

On 11 July, the CFTC held an open commission meeting to consider: (i) a supplemental proposal on exemption from derivatives clearing organization registration; (ii) a proposed rule on registration with alternative compliance for non-U.S. derivates clearing organizations; and (iii) a proposed rule on customer margin rules relating to security futures, which had been previously unanimously approved by seriatim and announced earlier in the week. The CFTC voted on both proposals during its open meeting.  The CFTC voted unanimously to approve the proposed rule on registration with alternative compliance. With a 3 to 2 vote, the CFTC also approved the proposal on exemption from derivatives clearing organization registration.

  • In his opening statement, CFTC Chairman Giancarlo spoke about his support for the two proposals at hand. Regarding the alternative compliance proposal, he said that it contains “objective and transparent criteria… [which] are what all regulators around the world should strive for to provide appropriate predictability and stability to the markets.” With regards to the proposal dealing with exemption from DCO registration, he stated it was “wholly appropriate to permit U.S. eligible contract participants that are institutional, not retail, investors to exercise business judgment in this area.”

  • In her opening statement CFTC Commissioner Dawn Stump spoke about her general support for the proposals; however, she cautioned that “these proposals may be a bit too rigid to pragmatically facilitate increased swaps clearing by U.S. customers.” With regards to the proposed rule on alternative compliance, Stump stated that the proposal “fails to address, and in my opinion may even worse, a challenge of great concern to this Commission – the increased strain on our registered FCMs [(futures commission merchants)].” With regards to the proposed rule on exemption from derivatives registration, Stump maintained her reservations “about the lack of optionality for registered FCMs to engage in clearing services for their customers.” In closing, Stump stated there was more work to be done in “the way of the CFTC extending deference to other jurisdictions and vice versa.”

  • In his opening statement, CFTC Commissioner Quintenz spoke about his support of the proposals, which he believes “embrace a view of global swaps market regulation based on open competition and choice, deference to comparable foreign jurisdictions, and cooperation with the CFTC’s foreign counterparts.” In regards to the proposal on alternative compliance, Quintenz stated that it “recognizes that foreign regulators have a substantial interest and expertise in supervising DCOs [(derivatives clearing organizations)] located in their home jurisdictions” by helping to define substantial risk in order to create a “transparent, fact-based procedure for determining when a foreign DCO poses a substantial risk to the U.S. financial system.” Quintenz also stated that “today’s supplemental proposal to permit exempt DCOs to clear swaps for U.S. customers will provide greater choice and flexibility to market participants.”

  • CFTC Commissioner Berkovitz issued two statements regarding the proposals at hand. In his first statement, Berkovitz dissented from the proposal to exempt certain clearinghouses from DCO registration requirements. He stated the proposal would “jeopardize U.S. customers, create systematic risks to the U.S. financial system, promote the use of foreign intermediaries at the expense of U.S. firms, and exceed this agency’s limited exemptive authority.” In his second statement, Berkovitz expressed his support for the proposal to permit registration with alternative compliance for non-U.S. DCOs. Berkovitz stated that this proposal “seeks to satisfy both the CFTC interest in protecting U.S. customers accessing a non-U.S. DCO and the interests of the home regulator in overseeing the activities of the non-U.S. DCO within its jurisdiction.”

CFTC and Japan Financial Services Agency Issue Joint Statement Regarding Derivatives Trading Venues

On 11 July, the CFTC and the Japan Financial Services Agency (“JFSA”) issued a joint statement regarding the comparability of certain derivatives trading venues in the U.S. and Japan.  The agencies issued “an order exempting certain derivatives trading facilities regulated by the JFSA from the requirement to register with the CFTC as swap execution facilities.”  CFTC Chairman Giancarlo stated that this order would “not only support the cross-border activities of participants in the financial markets, but also help avoid market fragmentation, protectionism, and regulatory arbitrage.”

Commissioner Stump Announces Progress in the CFTC’s Data Protection Initiative

On 12 July, CFTC Commissioner Stump provided an update of the CFTC’s Data Protection Initiative, a program meant to “serve as a pathway to better ascertain the CFTC’s regulatory data needs and enhance its internal data protection measures.” Stump announced that the Scope component, the first of five parts, “has been successfully completed and we now have an updated and detailed Data Catalogue at the CFTC.”  This Data Catalogue contains a variety of information including: “information concerning the regulation providing the authority of the collection, type of entity serving as the data submitter, category of data reported, primary CFTC data user, technology or interface by which it is collected, whether the collection is ad-hoc or recurring, and the frequency of the submission.”

CFTC Staff Announcements

On 9 July the CFTC announced that Erica Elliot Richardson, Director of the CFTC’s Office of External Affairs, will leave the agency later this summer.

On 12 July, the CFTC announced that Maggie Sklar, Senior Counsel to Chairman Giancarlo, will leave the agency upon Giancarlo’s departure in July. 

Bank Regulators

Fed Holds Research Conference on Stress Testing

On 9 July, the Fed hosted a research conference at the Federal Reserve Bank of Boston regarding bank stress testing. The participants discussed a number of aspects with regards to bank stress tests, including: (i) the use of stress tests as a policy tool, (ii) dynamism and transparency in stress testing, and (iii) understanding the effects of conducting stress tests.

o    Fed Chair Jerome Powell delivered the opening remarks at the conference. In his remarks, he emphasized that “[a]s financial institutions and the financial system evolve, stress testing will need to keep up.” He further noted that “when the next episode of financial instability presents itself, it may do so in a messy and unexpected way” and that “[b]anks will need to be ready not just for expected risks, but for unexpected ones.” Consequentially, he argued that “[i]f the stress tests do not evolve, they risk becoming a compliance exercise, breeding complacency from both supervisors and banks.”

o    Fed Vice Chair for Supervision Randal Quarles also delivered remarks at the conference. Quarles echoed much of what Powell had stated, noting that “[i]f stress tests are to continue to be relevant and effective, I strongly believe that they must continue to change: they must respond to changes in the economy, the financial system, and the risk-management capabilities of firms.” In addition, Quarles examined a number of recent changes and proposed changes to the stress testing framework, including: (i) enhancing the transparency around the stress test models and testing process, noting that the Fed published enhanced disclosures on two of the key models used in stress testing and stating that the Fed will “publish disclosures about two additional model in 2020 and each year thereafter until we have provided transparency about all our stress test models”; (ii) adopting a proposed “stress capital buffer” that would “simplify the Fed’s large bank capital rule by integrating the stress testing process with our traditional regulatory capital rules”; and (iii) being able to distinguish between “useful variation in the tests, in the form of exploration of salient risks” from “less useful variation, in the form of unexpected swings in capital requirements that don't have any particular relationship to changing risks at individual firms.”

Bank Regulators Adopt Final Rule to Simplify Regulatory Capital Rules for Non-Advanced Approaches Banking Organizations

On 9 July, the Fed, FDIC, and OCC jointly adopted a final rule to simplify regulatory capital rules for banking organizations that are not subject to the advanced approaches capital rule, a category of banks that generally includes institutions with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure (“non-advanced approaches banking organizations”). Under the final rule, “non-advanced approaches banking organizations will be subject to simpler regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences, and investments in the capital of unconsolidated financial institutions than those currently applied.” In addition, the final rule will simplify “the calculation for the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties … that is includable in regulatory capital” for non-advanced approaches banking organizations. Lastly, the final rule makes “technical amendments to, and clarifies certain aspects of, the agencies’ capital rule for both non-advanced approaches banking organizations and advanced approaches banking organizations.” The final rule will be effective as of 1 April 2020 for the amendments regarding capital rules and effective as of 1 October 2019 for revisions to the pre-approval requirements for the redemption of common stock and other technical amendments.

Fed Publishes White Paper Regarding Effects of Synthetic Identity Payment Fraud

On 9 July, the Fed published a white paper examining the effects of synthetic identity payment fraud, which is payment fraud carried out using created identities based on a mixture of real personal information (such as a legitimate social security number (“SSN”)) and fictional personal information (such as a made-up name, address or date of birth). The report found that there has been a significant increase in the use of synthetic identify fraud due to a number of factors, such as: (i) “the near-universal use of SSNs as identifiers in the United States”; (ii) “data breaches that increasingly expose more PII [(personally identifiable information)]”; and (iii) gaps in the credit process.” The report then discusses the consequences of this trend and indicated that the Fed intends to focus on addressing this issue.

Fed Vice Chair for Supervision Quarles Sends Letter to Senators Regarding International Insurance Capital Standard

On 9 July, Fed Vice Chair for Supervision Quarles sent a letter to Senator Michael Rounds (R-SD) in response to a letter sent to Quarles by Rounds and 41 other senators regarding the development of an international Insurance Capital Standard (“ICS”). The lawmakers had expressed concerns that “a global capital standard for insurers is not required” and that “an ICS is not implementable in the United States.” Quarles responded: “As evaluation of the feasibility of an ICS proceeds, it is important to recall that in order for any form of an ICS to be implementable, it needs to be suitable for the U.S. insurance market.  Furthermore, the ICS, or any standard produced by the IAIS [(International Association of Insurance Supervisors)], is a voluntary standard that is not binding and would need to be adopted voluntarily by each member jurisdiction in accordance with applicable domestic laws.”  

Fed and FOMC Release FOMC Meeting Minutes for 18-19 June

On 10 July, the Fed and its Federal Open Market Committee (“FOMC”) released the minutes for the FOMC meeting held on 18-19 June 2019. The meeting participants (i) identified that “Treasury yields fell sharply and far-forward measures of inflation compensation dropped significantly in the United States and abroad,” leading “market participants reportedly view[ing] communications by Federal Reserve officials as signaling a greater likelihood of a cut in the target range for the federal funds rate later in the year”; (ii) “judged that uncertainties and downside risks surrounding the economic outlook had increased significantly over recent weeks”; and (iii) agreed that the “economy appeared to have lost some momentum” due to a number of factors, including “recent weak indicators for business confidence, business spending and manufacturing activity; trade developments; and signs of slowing global economic growth.” In addition, the FOMC voted to: (i) keep the interest rate paid on required and excess reserve balances at 2.35 percent, effective June 20, 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.

FDIC Releases Initial Sections of Applications Procedures Manual

On 10 July, the FDIC posted sections of its Applications Procedures Manual to its website “to provide greater transparency regarding the FDIC’s internal processes.” The manual provides direction for professional staff assigned to review and process applications, notices, and other requests submitted to the FDIC.   

Fed Governor Brainard Delivers Speech Regarding Economic Outlook and Monetary Policy

On 11 July, Fed Governor Lael Brainard delivered remarks at the Community Bankers Roundtable in Scranton. Pennsylvania, in a speech entitled “Perspectives on the Economy from Scranton.” Brainard noted that while “the economy is growing solidly” and “financial conditions overall remain quite supportive of continued employment and output growth,” “capital spending by businesses has been lackluster, and indicators of business sentiment have been soft.” She also noted that “[w]hile the modal outlook is solid, the downside risks, if they materialize, could weigh on economic activity.” Lastly, she said that she was “mindful that low spreads on corporate credit, together with risky corporate debt at historic highs, suggest financial imbalances are growing,” and she urged bank regulators to “address[] these financial imbalances by activation of the countercyclical capital buffer, more rigorous use of stress tests, and active monitoring of leveraged lending.” 

Fed Vice Chair for Supervision Quarles Delivers Remarks on Regulatory and Supervisory Issues

On 11 July, Fed Vice Chair for Supervision Quarles delivered remarks and fielded questions at the Bipartisan Policy Center in Washington, D.C. Quarles discussed the subject of a countercyclical counter buffer (“CCyB”), which centers on increasing or decreasing mandatory bank capital requirements depending on the economic environment. Quarles said that although the Fed has never officially turned on the CCyB, the buffer effectively is on because of the high capital requirements already in place. Separately, Quarles said that he expects that the Fed and other agencies will release “early in the fall” a proposal that “responds to a lot of the comments we’ve received” on an earlier proposal to revamp the Volcker Rule to ease some of the regulatory burdens and trading limitations placed on banks by the Dodd-Frank Act.        

Bank Regulators Propose Rule Regarding Capital Treatment of Land Development Loans

On 12 July, the Fed, FDIC, and OCC issued and invited public comment on a proposed rule to clarify the treatment of land development loans under the regulators’ capital rules. The proposal follows the regulators’ September 2018 proposal to revise the definition of high volatility commercial real estate (“HVCRE”) and “would clarify that loans that solely finance the development of land for residential properties would meet the revised definition of HVCRE, unless the loan qualifies for another exemption.” Comments on the proposal will be due 30 days after its publication in the Federal Register. 

 

UPCOMING EVENTS

 

o    July 15: Comments are due on the CFTC’s proposed rule regarding “Derivatives Clearing Organization General Provisions and Core Principles.”

o    July 15: Comments are due on the Fed’s proposal “that would revise the Board’s regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act of the Home Owners’ Loan Act.”

o    July 15: Comments are due on the Consumer Financial Protection Bureau’s (“CFPB”) “Plan for the Review of Bureau Rules for Purposes of the Regulatory Flexibility Act.” 

o   July 16: The Senate Banking Committee will hold a hearing entitled “Examining Facebook’s Proposed Digital Currency and Data Privacy Considerations.”

o   July 16: The FDIC will hold an open meeting to discuss: (i) “Final Rule to Amend 12 C.F.R. Part 370, ‘Recordkeeping for Timely Deposit Insurance Information’”; (ii) “Final Rule on Joint Deposit Accounts”; and (iii) “Notice of Proposed Rulemaking – Proposed Amendment to Securitization Safe Harbor Rule.”

o   July 16: The House Financial Services Committee will convene for a continuation of its 11 July 2019 markup.

o   July 17: The House Financial Services Committee will hold a hearing entitled “Examining Facebook’s Proposed Cryptocurrency and Its Impact on Consumers, Investors, and the American Financial System.”

o   July 17: The Senate Banking Committee’s Subcommittee on Economic Policy will hold a hearing entitled “Economic Mobility: Is the American Dream in Crisis?”

o   July 18: The Senate Banking Committee will hold a hearing entitled “Export Control Reform Implementation: Outside Perspectives.”

o    July 18: SEC will host a roundtable on short-term/long-term management of public companies and the SEC’s periodic reporting system and regulatory requirements.

o    July 19: Comments are due on the CFTC’s  “Notice of Intent to Revise Collection Numbers 3038-0087, Reporting, Recordkeeping, and Daily Trading Records Requirements for Swap Dealers and Major Swap Participants”.

o    July 19: Comments are due on the CFTC’s “Notice of Intent to Revise Collection [Numbers] 3038-0089, Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps”

o   July 24: The House Financial Services Committee will hold a hearing entitled “The Next Megabank? Examining the Proposed Merger of SunTrust and BB&T.

o   July 25: The House Financial Services Committee’s Task Force on Financial Technology will hold a hearing entitled “Examining the Use of Alternative Data in Underwriting and Credit Scoring to Expand Access to Credit.”

o    July 25: The FDIC and CFPB will host a webinar on elder financial abuse prevention.

o    August 13: The SEC will hold a meeting of its Small Business Capital Formation Advisory Committee.

o    August 14: The SEC will host the 38th Annual Government-Business Forum on Small Business Capital Formation.

Ianthe Zabel
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