US Regulatory Research
House Financial Services Committee Holds Markup
On 16 July, the U.S. House Committee on Financial Services (“House Financial Services Committee”) held a markup in which it advanced eight bills related to consumer and investor protection and disaster relief funding programs:
Senate Banking Committee Holds Hearing on Proposed Libra Cryptocurrency
On 16 July, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) held a hearing entitled “Examining Facebook’s Proposed Digital Currency and Data Privacy Considerations.” David Marcus, the Head of Calibra at Facebook, testified at the hearing. Libra is a proposed cryptocurrency that would be governed by an association of one hundred companies called the Libra Association. The value of a libra would be set by the association based on a basket of government-backed currencies held in reserve in Switzerland. In his testimony, Marcus stated, “Facebook will not offer the Libra digital currency until we have fully addressed regulators [sic] concerns and receive appropriate approvals.” There was bipartisan concern from committee members about the role of Facebook, based on concerns about: (i) past conduct regarding transparency and data protection; and (ii) the governance and monetization of the platform. Senator Bob Menendez (D-NJ) summed up these sentiments when he said that “trust is something you earn and Facebook certainly hasn’t earned it.” Several members asked questions about money laundering and terrorist financing. Senator Chris Van Hollen (D-MD) rooted his opposition in his belief that something like a real-time payments system should not be run by a consortium of large companies.
House Financial Services Committee Hold Hearing on Proposed Libra Cryptocurrency
On 17 July, the House Financial Services Committee held a hearing entitled “Examining Facebook’s Proposed Cryptocurrency and Its Impact on Consumers, Investors, and the American Financial System.” Testifying at the hearing were: David Marcus, Head of Calibra at Facebook; Chris Brummer, Anges W. Williams Research Professor, Georgetown University Law Center; Katharina Pistor, Edwin B. Parker Professor of Comparative Law at Columbia Law School; Gary Gensler, Professor of the Practice of Global Economics and Management, MIT Sloan School of Management; Robert Weissman, President, Public Citizen; and Meltem Demirors, Chief Strategy Officer, CoinShares. Marcus received questions on Facebook’s lack of public trust, the definition of a libra, whether it is an exchange-traded tool, and how Facebook plans to comply with regulations if Libra is not considered a security or a commodity. Marcus was also asked about the Libra Association and its selection process for members, as well as its proposed location in Switzerland. Marcus was repeatedly asked if Facebook would commit to increased oversight, to which he promised that Facebook would not release the product until all issues had been clarified and resolved. In response to Chairwoman Maxine Waters (D-CA) demand that Facebook cease working on Libra until a regulatory framework has been established, Marcus said that “this needs to be analyzed, understood, and the proper oversight needs to be set up before Libra can launch.” Brumer testified that the Libra White Paper: (i) fails to inform potential holders that there is a possibility to lose money and that runs on the digital currency are possible; (ii) fails to disclose that holders of Libra are making themselves vulnerable to counterparty risk, specifically the mismanagement of reserve investments; (iii) fails to disclose the potential impact of governance risks and conflicts of interest on the nature and value of Libra coins; (iv) fails to disclose how its decentralized nature affects the secure blockchain that Facebook is committing to ensure; and (v) Libra could comprise a source of systemic risk. Pistor testified about Libra’s accountability, stating that “the choice of the legal structure means that the members of the Libra Association will be insulated from liability and accountable only to themselves. The members will not be accountable to holders of Libra coins or to the citizens of countries that create the safe assets used to backstop Libra.” Gensler testified that the Libra Reserve “is a pooled investment vehicle that should at a minimum, be regulated by the Securities and Exchange Commission,” but there is some potential for the Libra Reserve to be considered a bank. Weissman testified that Facebook “should not be permitted to proceed with its plans to create a private, global currency.” Demirors testified that “[Libra] simply cannot be compared to Bitcoin, due to large fundamental differences,” specifically, unlike Bitcoin, Libra is “centralized,” “asset-backed,” and “permissioned.”
At the hearing the committee also considered H.R. ______, the Keep Big Tech Out of Finance Act [DRAFT].
Senate Banking Committee Republicans Send Letter to SEC on Capital Formation
On 18 July, the Republican Senators of the Senate Banking Committee sent a letter to Securities and Exchange Commission (“SEC”) Chairman Jay Clayton, commending the SEC’s Spring Agency Rule List as identifying “an ambitious agenda covering a broad range of topics that have received bipartisan support in Congress.” The Senators specifically encourage the SEC, as it “considers harmonization of exempt offerings,” to “prioritize revising Regulation D to allow for general solicitation and general advertising by sponsors,” arguing that the prohibition on general solicitation is “a roadblock for small businesses looking to obtain needed capital.” They also “encourage the Commission to prioritize expanding the ability for small businesses to crowdfund” and “support the Commission expanding the definition of accredited investor for increasing investor participation in private offerings.” Further, the Senators encourage the SEC, as it “considers changes to the accelerated filer definition in Exchange Act Rule 12b-3,” to “move forward in a way that provides relief to all smaller reporting companies.” Finally, the Senators urge the Commission to move forward with the information it gathered in its staff roundtable regarding the proxy process, noting it is “time to re-examine the standards of inclusion of proposals related to environmental, social or political agendas and ensure that the proxy votes cast on behalf of retail investors reflect the economic interests of the retail investors.” In particular, they express support for the SEC’s consideration of shareholder proposal thresholds, noting that the current rules “have “empowered a very small number of individuals with limited investment stakes, if any, to consume corporate boardrooms, increasing the costs of being a publicly traded company.”
Senate Banking Committee Holds Hearing on Export Controls
On 18 July, the Senate Banking Committee held a hearing entitled “Export Control Reform Implementation: Outside Perspectives.” This hearing followed up on the implementation of two bills passed in the 115th Congress: (i) the Foreign Investment Risk Review Modernization Act (“FIRRMA”); and (ii) the Export Control Reform Act (“ECRA”). Testifying at the hearing were: Eric Hirschhorn, former Under Secretary for Industry and Security at the U.S. Department of Commerce (“Commerce”); Nova Daly, Senior Public Policy Advisor at Wiley Rein LLP; and Ben Buchanan, Senior Faculty Fellow, Center for Security and Emerging Technology at Georgetown University. Specifically, the hearing sought outside perspectives on advanced notice of proposed rulemakings from the Bureau of Industry and Security at Commerce related to the designation of “emerging and foundational technologies” for review by the Committee on Foreign Investment in the United States. Principal concerns included: (i) balancing export controls with innovation; (ii) defining “emerging technologies” in export controls; and (iii) the importance of using export controls to manage hardware sales. Lastly, there was discussion among senators and witnesses about the importance and difficulty of harmonizing export controls multilaterally among allies. The witnesses agreed that Congress should allow more time for FIRRMA and ECRA implementation before considering legislative changes.
SEC & Securities
SEC and NASAA Explain Application of Securities Laws to Opportunity Zone Investments
On 15 July, the SEC and the North American Securities Administrators Association (“NASAA”) issued a joint statement explaining the application of the federal and state securities laws to opportunity zone investments, which were established by the “Tax Cuts and Jobs Act in December 2017 to provide tax incentives for long-term investing in designated economically distressed communities.” The statement analyzes the opportunity zone program and explains “when interests in qualified opportunity funds would be securities under federal and state securities laws.” It also “provides an overview of the SEC and state requirements relating to qualified opportunity funds and their securities offerings, broker-dealer registration, and considerations for advisers to a qualified opportunity fund.”
SEC Retail Strategy Task Force to Host Roundtable on Combating Elder Investor Fraud
On 18 July, the SEC announced that its Retail Strategy Task Force will host a roundtable on 3 October 2019 regarding combating elder investor fraud. The roundtable will “focus on the types of fraudulent and manipulative schemes currently targeting elder investors” and “explore views from a broad range of regulators and industry experts on potential steps regulators, broker-dealers, investment advisers, and others can take to identify and combat elder investor fraud.”
CFTC & Derivatives
Tarbert Begins Term as 14th CFTC Chairman and Announces Appointments
On 15 July, the Commodity Futures Trading Commission (“CFTC”) announced that Heath Tarbert has begun his term as the 14th Chairman of the CFTC. Tarbert was nominated by President Donald Trump and his term expires on 13 April 2024. Tarbert stated that he is looking forward to “working with each Commissioner and the talented staff at the CFTC to ensure our derivatives markets remain vibrant and wrongdoers are held accountable.”
o Jaime Kilma, as Chief of Staff and Chief Operating Officer;
o N. Charles Thornton III, as Counselor to the Chairman;
o Thomas Benison, as Chief Negotiator for Internal Agreements;
o Matthew Daigler, as Senior Counsel to the Chairman;
o Daniel Grimm, as Senior Counsel to the Chairman;
o Andrew Ridenour, as Senior Counsel to the Chairman;
o Chelsea Pizzola, as Deputy Chief of Staff and Counsel to the Chairman;
o Melissa Benedict, as Executive Assistant to the Chairman;
o Anna Rosenberg, as Special Assistant to the Chairman and Legislative Specialist;
o James McDonald, as Director of the Division of Enforcement;
o Amir Zaidi, as Director of the Division of Market Oversight;
o Joshua Sterling, as Director of the Division of Swap Dealer and Intermediary Oversight;
o Bruce Tuckman, as Chief Economist and Director of the Office of the Chief Economist;
o Michael Short, as Director of the Office of External Affairs and Chief Communications Officer;
o Sarah Summerville, as Director of the Office of Minority and Women Inclusion.
FDIC Amends Rules Regarding Recordkeeping Requirements for Deposit Insurance Determinations
On 16 July, the Federal Deposit Insurance Corporation (“FDIC”) adopted final rules amending Part 370 and Part 330 of the FDIC's rules and regulations to simplify the process for making insurance determinations in the event a bank is placed into receivership.
o Part 370 requires an insured depository institution to: (i) “configure its information technology system … to be capable of calculating the insured and uninsured amount in each deposit account by right and capacity”; and (ii) “maintain complete and accurate information needed by the FDIC to determine deposit insurance coverage with respect to each deposit account.” Amendments to Part 370 include, among other things: (i) an optional one-year extension of the rule's original compliance deadline of 1 April 2020; (ii) “clarifications regarding compliance certification, and the effect of a change in law or a merger transaction on compliance”; and (iii) changes to “the alternative recordkeeping requirements for certain types of deposit relationships.”
o Part 330 requires that each co-owner of a deposit account personally sign a deposit account signature card before the account can be insured as a joint account. Amendments to Part 370 provide an alternative method to satisfy the "signature card" requirement such that the requirement can be satisfied by “information contained in the deposit account records of the insured depository institution establishing co-ownership of the deposit account, such as evidence that the institution has issued a mechanism for accessing the account to each co-owner or evidence of usage of the deposit account by each co-owner.”
Fed Chair Powell Delivers Speech Regarding Monetary Policy in the Post-Crisis Era
On 16 July, Federal Reserve (“Fed”) Chair Jerome Powell delivered a speech at "Bretton Woods: 75 Years Later -- Thinking about the Next 75," a conference in Paris organized by the Banque de France and the French Ministry for the Economy and Finance. The conference focused on monetary policy in the post-crisis era. Powell began his speech by discussing the current economic conditions in the U.S., noting that the “U.S. economy is now in its 11th consecutive year of growth” and that “[u]nemployment has steadily declined from its 10 percent post-crisis peak and has now remained at or below 4 percent for more than a year, the longest stretch in a half century.” He then highlighted some significant structural changes in the environment facing monetary policymakers in the post-crisis era, including persistently lower rates of interest, growth, and inflation due to “well-anchored inflation expectations in the context of improved monetary policy, demographics, globalization, slower productivity growth, greater demand for safe assets, and weaker links between unemployment and inflation.” He also discussed the use of “unconventional measures” outside of the “conventional monetary policy tools” to combat recessions, including “new forms of forward guidance and a range of balance sheet policies.” Lastly, he emphasized that “the crisis and Great Recession brought into stark relief the need for transparency and accountability for central banks” because “clear, transparent communication about the economy, the risks, and our policy responses is critical for the effectiveness of our tools and for our accountability to the public in a democratic society.”
Fed Issues Its February 2019 Beige Book
On 17 July, the Fed released its July 2019 Beige Book, which is a summary of commentary on current U.S. economic conditions. According to the document, economic activity “continued to expand at a modest pace overall from mid-May through early July, with little change from the prior reporting period,” and “[t]he outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty.” “[E]mployment grew at a modest pace, slightly slower than the previous reporting period.” In addition, “the rate of price inflation was stable to down slightly from the prior reporting period.” The next Beige Book will be published on 4 September 2019.
Bank Regulators Issue Statement Regarding Treatment of Certain Foreign Funds under the Volcker Rule
On 17 July, the Fed, FDIC, and Office of the Comptroller of the Currency (“OCC”) (collectively, the “Bank Regulators”), in consultation with the SEC and CFTC, jointly issued a statement regarding the extension of exclusions of certain foreign funds from the requirements under Section 13 of the Bank Holding Companies Act of 1956 (“BHC Act”), otherwise known as the Volcker Rule. After the adoption of the Volcker Rule, a number of foreign banking entities expressed concern that certain foreign funds excluded from the definition of “covered funds” may still be affected by the Volcker Rule because certain foreign excluded funds may still fall within the definition of “banking entity” under the BHC Act. In response, the Bank Regulators issued in 2017 a policy statement stating that they would not propose to take action against certain foreign banking entities based on “attribution of the activities and investments of a qualifying foreign excluded fund … to the foreign banking entity, or against a qualifying foreign excluded fund as a banking entity.” The Bank Regulators also issued in 2018 a notice of proposed rulemaking that would have adopted amendments to the Volcker Rule such that the Bank Regulators would not treat foreign excluded funds that meet the conditions included in the 2017 policy statement as banking entities through 21 July 2019. The Bank Regulators note that they have yet to finalize any regulations to address the concerns noted above and consequentially decided to extend their proposal of non-action against certain foreign banking entities for an additional two-year period, ending 21 July 2021.
o July 23: The Senate Banking Committee will hold a hearing entitled “Challenges for Cannabis and Banking: Outside Perspectives.”
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 Consumer Financial Protection Bureau will host a webinar on elder financial abuse prevention.
o July 25: The SEC’s Investor Advisory Committee will hold a public meeting to discuss: (i) the SEC’s approach to regulation in areas with limited competition; (ii) trends in investment research and the impact of MiFID II; and (iii) the proxy process.
o July 29: The SEC’s Fixed Income Market Structure Advisory Committee will hold a public meeting, the agenda for which is yet to be finalized.
o August 13: The SEC’s Small Business Capital Formation Advisory Committee will hold a public meeting, the agenda for which is yet to be finalized.
o August 14: The SEC will host the 38th Annual Government-Business Forum on Small Business Capital Formation.