Monthly Archives: November 2017

SEC Chair Jay Clayton Sets “Near-Term” Regulatory Goals

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SEC Chair Jay Clayton laid out near-term narrowly focused regulatory goals and committed the agency over the long term to greater transparency. The set of priorities will be published as part of the federal government’s Unified Agenda.

In remarks at the Practical Law Institute’s 49th Annual Institute on Securities Regulation, Chair Clayton discussed the SEC approach to developing the agency’s five-year strategic plan while articulating short-term narrowly focused efforts. He identified the following immediate efforts:

  • Initial Coin Offerings (“ICOs”): ICOs are vulnerable to price manipulation and other fraudulent actions. The SEC will continue to take steps to warn investors about the enhanced risks presented by ICOs, and to protect market participants from some of these risks. The SEC plans to offer clarification as to (i) how tokens are listed on exchanges (and the standards for listing), (ii) how tokens are valued, and (iii) what protections exist for investors and market integrity.
  • Fee Disclosures: Hidden or inappropriate fees and expenses can harm investors. The SEC will pursue enforcement for fee disclosure-related cases, and look to clarify fee disclosure requirements in order to reduce opportunities for misconduct.
  • Penny Stocks: Reliable information is often unavailable for penny stock issuers. The SEC will seek to expose some of the “opaque aspects” of the penny stock market.
  • Transaction Processing: Transfer agents are “well-positioned” to prevent the distribution of unregistered securities. The SEC will monitor transaction processing, particularly with regard to restricted securities.
  • Investor Education: The SEC is creating a searchable database that will contain information on individuals who have been barred or suspended due to federal securities law violations.

In terms of long-term initiatives, Chair Clayton identified shareholder engagement and the proxy process as an area of focus. He emphasized the importance of proxy rules in providing an avenue for shareholder engagement, and said the SEC will conduct a close examination of whether the current rules are effectively meeting both shareholder and company needs. Chair Clayton explained further that voting power often sits with investment advisers rather than shareholders, thereby limiting shareholder participation rates in the proxy process. He stated that the proxy process may demand a review and corresponding updates to ensure that long-term retail investors are fairly represented in corporate governance. Regarding shareholder proposals, Chair Clayton said the SEC intends to find common ground between the viewpoints held by all stakeholders. This will include an examination of ownership level thresholds for the submission of shareholder proposals and the resubmission process.

Chair Clayton highlighted the importance of transparency in the securities markets. He noted that enforcement plays an important role in ensuring transparency, and stressed that transparency can play a role in deterring, mitigating or eliminating wrongdoing before an enforcement action becomes necessary.

Lofchie Comment: From a financial policy standpoint, the SEC’s renewed focus on its traditional economic missions (good disclosure, investor protection) is an important change in priorities. When combined with a rulemaking agenda that is limited to achievable and announced goals, businesses are better able to prepare.

Congrats Randal Quarles on Fed Appointment…

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Congratulations to Randy Quarles for his appointment and confirmation to serve as the Vice Chairman of the Federal Reserve Board.

CFS is thankful for Randy’s early and constant support of our organization. As an Advisory Board Member and Trustee, he has been a source of wisdom on a wide range of topics. In particular, his involvement in “Bretton Woods: The Founders and Future” was especially productive and meaningful. The inspiration and encouragement from Randy will continue to guide CFS especially as we plan to honor the 75th anniversary of the birth of the international financial system and think strategically about the future.

See “Summary and Next Steps  – Bretton Woods: The Founders and Future.”

Randy is uniquely experienced, remarkably learned, and thoughtful on virtually any monetary, regulatory, or related legal topic. Likewise, few to none are more honorable in character.

We wish him the best at the Fed.

CFTC Chair J. Christopher Giancarlo Criticizes “EU Plan to Invade U.S. Markets”

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CFTC Chair J. Christopher Giancarlo warned of the potential negative effects of European regulatory changes on U.S. financial markets.

In an Opinion/Commentary in The Wall Street Journal, Chair Giancarlo argued that as a result of Brexit pushing London financial markets outside of the European “regulatory umbrella,” the European Commission is proposing to delegate regulation of non-European Union entities to the European Central Bank (“ECB”) and the European Securities and Markets Authority (“ESMA”). Chair Giancarlo is concerned that U.S. financial institutions would now be subject to European regulatory oversight. In particular, he is concerned about potential European Commission regulations that might allow ESMA to conduct on-site inspections of U.S. businesses, like the Chicago Mercantile Exchange, without informing the CFTC.

Chair Giancarlo asserted that such regulatory measures would negatively affect U.S. markets, and potentially “dry up the capital necessary for growth and job creation.” Chair Giancarlo argued that “overlapping” regulation inhibits growth, and said that U.S. acceptance of European regulation would represent a “dangerous precedent.” The “rules-based” European approach contrasts with the “principles-based” U.S. approach, he said, and so any imposition of additional burdens is the “last thing” that the American economy needs.

Lofchie Comment: Not so long ago, CFTC Commissioners were imagining the adoption of U.S. regulations that would have required the rest of the world to acquiesce. CFTC Commissioner Chilton Delivers Speech before International Regulators Conference (with Lofchie Comment). The current Chair is now left to see if peace can be made.

FERC at Full Strength as Senate Confirms Commissioners

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The U.S. Senate confirmed the nominations of Kevin McIntyre and Richard Glick to become members of the Federal Energy Regulatory Commission (“FERC”). The confirmations restore the Commission to full strength. Mr. McIntyre will serve as FERC Chair.

Mr. McIntyre is set to serve out the remainder of a term that ends June 2018 and begin a full term that ends June 2023. Mr. Glick is set to serve a five-year term that ends in 2022.

President Trump Nominates New Fed Chair

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President Donald J. Trump nominated Jerome H. Powell to be the next Chair of the Federal Reserve System. Pending Senate confirmation, Mr. Powell – a current member of the Board of Governors of the Federal Reserve System (“FRB”) – will replace current Chair Janet Yellen when her term expires in February 2018. Mr. Powell vowed to use his position to pursue the FRB goal of “stable prices and maximum employment.”

Mr. Powell has been an FRB Governor since 2012. He also served as Assistant Secretary and Undersecretary of the Treasury under President George H.W. Bush, and was a visiting scholar at the Bipartisan Policy Center in Washington, D.C.

Chair Yellen has served in her position since February 2014.

OCC Provides Guidance for Federal Branches and Agencies of Foreign Banks

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The Office of the Comptroller of the Currency (“OCC”) updated two documents providing guidance for OCC-supervised branches of foreign banking organizations (“FBOs”): (i) a paper titled The OCC’s Approach to Federal Branch and Agency Supervision (the “paper”), and (ii) the “Federal Branches and Agencies” booklet of the Comptroller’s Licensing Manual. The paper replaces a document from October 8, 2014, while the booklet is an update of a document previously issued in July 2015.

With the passage of the International Banking Act (“IBA”) of 1978, FBOs could opt to conduct banking operations through a branch or agency licensed by the OCC. Such licensed entities are known as “federal branches and agencies.” FBOs acting through federal branches and agencies generally have the same rights and responsibilities as national banks operating at the same locations and are subject to the same laws, regulations, policies and procedures that apply to national banks. There are important differences, however, between an FBO and a full-service bank with respect to OCC supervision.

The paper gives an overview of OCC regulatory practices with regard to FBOs. The OCC International Bank Supervision group of the Large Bank Supervision Department is responsible for the supervision program for these entities. The paper explains the supervisory approach for federal branches and agencies, including a “multifaceted” risk assessment process that takes into account the impact of the parent bank on each supervised entity. Supervision also includes onsite and offsite monitoring, cross-border coordination with home country regulators, and clear communication of examination results. The paper also includes a discussion of resolution and recovery planning, as well as of licensing processes.

The booklet includes all OCC policies and procedures for establishment, operations, and other activities for the federal branches and agencies of FBOs. It provides information regarding establishing branches or agencies, acquisitions, the conversion or contraction of operations, relocations, fiduciary powers, voluntary liquidation, and other relevant topics.

U.S. Senate Votes to Block CFPB Arbitration Rule

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The U.S. Senate voted on a resolution to overturn the Consumer Financial Protection Bureau’s (“CFPB”) arbitration rule. Republican senators Lindsey Graham of South Carolina and John Kennedy of Louisiana opposed the resolution, and Vice President Mike Pence cast the deciding vote in favor of striking down the rule to break a 50-50 tie.

The CFPB arbitration rule restricts mandatory arbitration clauses in certain consumer financial contracts. The rule has been subject to criticism from various sources who allege that the rule will greatly increase the number of class-action lawsuits, thereby benefiting the plaintiff’s bar and increasing costs to consumers. The U.S. Department of the Treasury recently released a report criticizing the rule and the CFPB’s review process in adopting the rule.

In July, Republicans in the House of Representatives and the Senate introduced joint resolutions to nullify the rule using the authority granted under the Congressional Review Act. Under the Congressional Review Act, a rule can be repealed by simple majority votes in both the House and the Senate within 60 legislative days of its finalization. The House promptly voted to block the rule in July and, by a narrow margin, the Senate has now voted to do the same. The resolution now will be put in front of President Trump, who is expected to sign it into law and block the rule from taking effect.

Lofchie Comment: The need for Congress and the President to undo the actions of the CFPB illustrates what an odd regulatory structure Dodd-Frank created in establishing the CFPB. The agency operates independently of, and now in opposition to, both the Executive and Legislative branches of government. While there are undoubtedly those who favor the rulemakings of the CFPB on a policy basis, that does not change the fact that the CFPB is, from a Constitutional standpoint, operationally unsound. Should a Democrat win in the next Presidential election, presumably the CFPB would be headed by a Republican and appointed by President Trump. Undoubtedly, such an appointee would seek to frustrate the goals of the next President. That is simply not the way that the government should work.