US Regulatory Research
The U.S. Congress remained in August recess.
Senator Warren Sends Letter to Wells Fargo
On 22 August, Senator Elizabeth Warren sent a letter to Allen Parker, Interim CEO and President of Wells Fargo, asking about a New York Times story that Wells Fargo had kept customers’ accounts active and was charging those accounts overdraft fees after the bank had informed customers that the accounts were closed. She has asked Parker to respond by September 3.
Chairwoman Waters Announces Fall 2019 Priorities
On 23 August, Chairwoman Maxine Waters (D-CA-43) issued a press release highlighting the U.S. House Committee on Financial Services’ (“House Financial Services Committee”) actions in the 116th Congress and priorities for the fall of 2019. The priorities are: (i) examining the state of minority depository institutions, (ii) reviewing stock buybacks, (iii) analyzing innovations in loan instruments, (iv) continuing a review of Libra, (v) examining the Terrorism Risk Insurance Program, (vi) exploring efforts to improve workplace diversity, and (vii) increasing access to homeownership by improving the Federal Housing Administration and reviewing housing finance reform. Additionally, the Committee’s two task forces on Artificial Intelligence and Financial Technology will continue to explore potential regulations.
SEC & Securities
SEC Clarifies Investment Advisers’ Proxy Voting Responsibilities and Application of Proxy Rules to Voting Advice
On 21 August at an open meeting, the Securities and Exchange Commission (“SEC”) clarified investment advisers’ proxy voting responsibilities and the applicability of the proxy rules. The guidance addresses the ability of investment advisers to establish a variety of different voting arrangements with their clients and matters investment advisers should consider when they use the services of a proxy advisory firm. In addition, the Commission (i) issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules and (ii) provided related guidance about the application of the proxy antifraud rule to proxy voting advice. Each of the SEC commissioners issued a statement on the guidance.
o SEC Chairman Jay Clayton said, “First, voting is important. Second, investment advisers who assume voting authority have duties of care and loyalty to their clients in fulfilling their voting obligations. The guidance we are considering today emphasizes these fundamental truths.” He believes that SEC guidance “will be helpful to investment advisors as they consider what voting obligations to take on and how to charge them.”
o SEC Commissioner Elad Roisman, who led the Commission’s evaluation of the proxy process, stated, “[U]pdating our guidance and providing additional interpretive clarity to address the realities of today’s markets is appropriate and many would say overdue.” Roisman emphasized the importance of proxy voting and the pivotal role that investment advisers play in proxy voting. He concluded that he hopes the guidance and interpretation will “help ensure that those who make voting decisions are doing so based on complete and accurate information.”
o SEC Commissioner Hester Pierce was pleased that the Commission is considering guidance related to proxy voting. Pierce noted, “The guidance we are voting on today is a good example of how the Commission can assist market participants—in this case investment advisers and proxy advisory firms—who are trying to serve their clients effectively and in a manner that complies with our rules.”
o SEC Commissioner Allison Herren Lee disagreed with the guidance, citing risks to shareholder voting rights. Lee said, “First, it introduces increased costs and time pressure into an already byzantine and highly compressed process. Second, it calls for more issuer involvement in the process despite widespread agreement among institutional investors and investment advisers that greater involvement would undermine the reliability and independence of voting recommendations.”
o SEC Commissioner Robert Jackson Jr. also dissented, arguing that the guidance “may alter the competitive landscape for the production and use of that advice -- without addressing whether doing so might make it harder for investors to oversee management.”
SEC Sets Registration Fee Rate for Fiscal Year 2020
On 23 August, the SEC announced that in fiscal year 2020 the fees that public companies and other issuers pay to register their securities with the Commission will be increased from $121.20 per million dollars to $129.80 per million dollars.
CFTC & Derivatives
CFTC Announces MRAC Meeting
On August 23, the Commodity Futures Trading Commission (“CFTC”) announced its Market Risk Advisory Committee (“MRAC”) is holding a public meeting on 9 September 2019 via teleconference. At the meeting, MRAC will discuss “issues involving transition from the London Inter-bank Offered Rate to risk-free reference rates, including contrary counterparty adjustments to discounting/price alignment interest and the clearing treatment for certain physically-settled swaptions.”
FDIC and OCC Approve Revisions to the Volcker Rule
On 20 August, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) (i) approved significant revisions to the Volcker Rule; and (ii) published a fact sheet regarding the revisions. The latest amendments to the Volcker Rule cover a number of topics, including: (i) compliance program requirements and thresholds; (ii) proprietary trading; and (iii) covered funds. The SEC, CFTC, and the Federal Reserve (“Fed”) have yet to approve the revisions.
o Compliance Program Requirements and Thresholds: The final rule establishes a three-tiered approach to tailoring the compliance program requirements, with the three tiers covering: (i) banking entities with “significant trading assets and liabilities” that have at least $20 billion in total consolidated trading assets and liabilities, which would be subject to the “six-pillar compliance program requirement,” “the metrics reporting requirements,” “the covered fund documentation requirements,” and the “CEO attestation requirement”; (ii) banking entities with “moderate trading assets and liabilities” that have between $1 billion and $20 billion in total consolidated trading assets and liabilities, which would be required to establish a “simplified compliance program”; and (iii) banking entities with “limited trading assets and liabilities” that have less than $1 billion in total consolidated trading assets and liabilities, which would be “presumed to be in compliance with the proposal and would have… no obligation to demonstrate compliance” unless the appropriate agency overseeing the entity determined otherwise.
o Proprietary Trading: Among other things, the final rule will not include the new proposed prong based on the accounting treatment of a position (accounting prong) in the “trading account” definition. Instead, the final rule will retain “a modified version of the short-term intent prong and replaces the 2013 rule’s rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account with a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account.” The final rule will also “modif[y] the liquidity management exclusion from the proprietary trading restrictions to permit banking entities to use a broader range of financial instruments to manage liquidity,” as well as adopt the “exemptions from the prohibitions … for underwriting and market making-related activities, risk-mitigating hedging, and trading by foreign banking entities solely outside the United States.”
o Covered Funds: The final rule will “include the proposed changes to the covered funds provisions for which specific rule text was proposed, including with respect to permitted underwriting and market making and risk-mitigating hedging with respect to a covered fund, as well as investment in or sponsorship of covered funds by foreign banking entities solely outside the United States and the exemption for prime brokerage transactions.” The bank regulators also indicated that they intend to publish “an additional notice of proposed rulemaking that would propose additional, specific changes to the restrictions on covered fund investments and activities and other issues related to the treatment of investment funds” under the Volcker Rule.
FDIC Issues Proposed Rule on Interest Rate Restrictions Applicable to Less Than Well Capitalized Institutions
On 20 August, the FDIC issued a notice of proposed rulemaking regarding interest rate restrictions that would apply to “less than well capitalized insured deposit institutions,” which are insured deposit institutions that fail to meet the required minimum capital ratios. Under the proposed rule, the FDIC would “amend the methodology for calculating the national rate and national rate cap for specific deposit products.” Specifically, the proposed rule would: (i) set the national rate as “the weighted average of rates paid by all insured depository institutions on a given deposit product, for which data are available, where the weights are each institution’s market share of domestic deposits”; (ii) “set the national rate cap for particular products … at the higher of (1) the 95th percentile of rates paid by insured depository institutions weighted by each institution’s share of total domestic deposits, or (2) the proposed national rate plus 75 basis points”; and (iii) “greatly simplify the current local rate cap calculation and process by allowing less than well capitalized institutions to offer up to 90 percent of the highest rate paid on a particular deposit product in the institution’s local market area.” The FDIC is also seeking comments regarding “alternative approaches to setting the national rate caps, including setting the national rate cap at the higher of the current rate cap or the previous rate cap.” The comment period closes 60 days after the notice is published in the Federal Register.
FDIC Issues Proposed Rule on Certain Assessment Credits
On 20 August, the FDIC issued a notice of proposed rulemaking that would “amend the deposit insurance assessment regulations that govern the use of small bank assessment credits and one-time assessment credits.” The proposal would require the FDIC to “automatically apply small bank credits to quarterly assessments when the reserve ratio is at least 1.35 percent, rather than 1.38 percent, as required under current regulation.” Subsequent to “applying credits for eight quarters, the FDIC would remit to [insured deposit institutions] the nominal value of any remaining small bank credits.” The comment period closes 30 days after the notice is published in the Federal Register.
Fed and FOMC Release FOMC Meeting Minutes for 30-31 July
On 21 August, the Fed and its Federal Open Market Committee (“FOMC”) released the minutes for the FOMC meeting held on 30-31 July 2019. In voting to lower the target range for the federal funds rate by 25 basis points from 2-1/4 to 2-1/2 percent to 2 to 2-1/4 percent, the participants identified three categories of reasons for supporting their decision: (i) “while the overall outlook remained favorable, there had been signs of deceleration in economic activity in recent quarters, particularly in business fixed investment and manufacturing,” which in part was due to “developments in, and uncertainties surrounding, international trade”; (ii) “a policy easing at this time would be a prudent step from a risk-management perspective,” as “many of the risks and uncertainties surrounding the economic outlook that had been a source of concern in June had remained elevated, particularly those associated with the global economic outlook and international trade”; and (iii) “there were concerns about the outlook for inflation” where “most participants judged that long-term inflation expectations either were already below the Committee’s 2 percent goal or could decline below the level consistent with that goal should there be a continuation of the pattern of inflation coming in persistently below 2 percent.” In addition, while a “couple of participants indicated that they would have preferred a 50 basis point cut in the federal funds rate,” “several participants favored maintaining the same target range at this meeting, judging that the real economy continued to be in a good place.” Nevertheless, the participants emphasized that they wanted to “avoi[d] any appearance of following a preset course” with regards to future interest rate adjustments and that they “generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook.”
o On 21 August, Federal Reserve Bank of Minneapolis President Neel Kashkari, who is a voting member of the FOMC, published an op-ed in the Financial Times stating that at the FOMC meeting in September, “[a]bsent some surprise reversal in these economic developments, I will argue that we should not only cut the federal funds rate, but that we should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver.”
o On 23 August, Federal Reserve Bank of Philadelphia President Patrick Harker, who is a voting member of the FOMC, stated in an interview with CNBC that he was “reluctant” in voting to lower the interest rate at the 30-31 July meeting and that the Fed should “stay here for a while and see how things play out.”
o On 23 August, Federal Reserve Bank of Kansas City President Esther George, who is a voting member of the FOMC, stated in an interview with Bloomberg that “[she] never pre-commit[s] to [her] decisions until [she] hear[s] the discussion around the table [and] take in the data that we see.” She did indicate, however, that “to the extent the economy unfolds as [she] expected, [she] did not see in July that interest rates were going to solve for some of the issues that might have been affecting things.”
OCC to Host Risk Governance and Credit Risk Workshops in Chicago
On 22 August, the OCC announced that it will host two workshops at the OCC Central District Office in Chicago on 1 and 2 October 2019 for directors of national community banks and federal savings associations supervised by the OCC. The 1 October workshop will focus on risk governance and improving director effectiveness and will include a discussion of the OCC’s approach to risk-based supervision and major risks in the financial industry. The 2 October workshop will focus on credit risk within the loan portfolio.
Fed Chair Powell Delivers Speech on Monetary Policy
On 23 August, Fed Chair Jerome Powell delivered a speech at the “Challenges for Monetary Policy" symposium, which was sponsored by the Federal Reserve Bank of Kansas City and held in Jackson Hole, Wyoming. With regards to economic conditions, Powell stated that “the outlook for the U.S. economy since the start of the year has continued to be a favorable one … [where] solid job growth and rising wages have been driving robust consumption and supporting moderate growth overall.” He warned, however, that the Fed has been monitoring three factors that are negatively affecting this outlook: (i) slowing global growth; (ii) trade policy uncertainty; and (iii) muted inflation. Powell then noted that the Fed and FOMC participants (i) “have generally reacted to these developments and the risks they pose by shifting down their projections of the appropriate federal funds rate path” and (ii) are currently “carefully watching developments as we assess their implications for the U.S. outlook and the path of monetary policy.” He noted that the past three weeks since the July FOMC meeting “have been eventful,” citing the imposition of new tariffs on China, “further evidence of a global slowdown, notably in Germany and China,” increasing tensions caused by “[g]eopolitical events,” such as “the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government.” Powell said that the Fed will assess the implications of these developments and will “act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”
o August 26: Comments are due on the CFTC and SEC’s joint proposed rules titled “Customer Margin Rules Relating to Security Futures.”
o August 28: The SEC will hold a closed meeting to discuss: (i) institution and settlement of injunctive actions; (ii) institution and settlement of administrative proceedings; (iii) resolution of litigation claims; and (iv) other matters relating to enforcement proceedings.
o September 5: The SEC’s Investor Advisory Committee will hold a public meeting to discuss the proxy process.
o September 10: The House Financial Services Committee will hold a hearing entitled “A $1.5 Trillion Crisis: Protecting Student Borrowers and Holding Student Loan Servicers Accountable.”
o September 11: The House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets will hold a hearing entitled “Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment.”
o September 11: The House Financial Services Committee’s Subcommittee on National Security, International Development and Monetary Policy will hold a hearing entitled “Examining the Macroeconomic Impacts of a Changing Climate.”
o September 12: The House Financial Services Committee’s Task Force on Artificial Intelligence will hold a hearing intitled “The Future of Identity in Financial Services: Threats, Challenges, and Opportunities.”