About Steven Lofchie

Steven Lofchie is Senior Fellow of Legal Studies at the Center for Financial Stability and Co-chairman of the Financial Services Department at Cadwalader, Wickersham & Taft LLP.

Senate Committee on Banking Considers Bills on Capital Formation and Corporate Governance

The U.S. Senate Committee on Banking, Housing and Urban Affairs (the “Senate Banking Committee”) considered legislative proposals on capital formation and corporate governance.

Chair Senator Mike Crapo (R-IA) stated that the Banking Committee has held three hearings in 2018 on legislative proposals – (i) the Helping Angels Lead Our Startups Act, (ii) the Fair Investment Opportunities for Professional Experts Act and (iii) the JOBS and Investors Confidence Act of 2018 – with respect to capital formation, corporate governance and the proxy process. Mr. Crapo said the purpose of the hearing is to address these bills again “in the context of identifying areas where we can find bipartisan consensus in the new Congress.” Mr. Crapo described the importance of unified legislative action, and added that it is “time to re-examine the standards of inclusion” for proposals that pursue environmental, social or political agendas.

In a separate statement, Senator Sherrod Brown (D-OH) touched on the importance of putting workers before Wall Street when considering these bills. He criticized the notion that it was a necessity for bills that facilitate capital formation, stating that time is better spent making sure that workers at companies such as Uber are receiving the wages and benefits they have earned, rather than “letting companies cut corners on their accounting controls.” Mr. Brown emphasized the importance of protecting ordinary American investors, noting that support for American companies should put employees first.

Lofchie Comment: It is disappointing that Senator Brown thinks it productive to attack the supposed “shortsighted obsession” of Wall Street. If he believes that the private sector is particularly cursed by an inability to think into the future, he should suggest a cure, rather than merely rehearse a cliché. Or is he suggesting that everything would be better if only elected officials made decisions as to capital allocation? That seems unlikely on its face, but if he believes it to be so, he should try to make the case for it. To what government – federal, state, or city – would he point as a model of long range investment planning?

New York Fed Officer Urges Firms to Prepare for LIBOR Transition

Executive Vice President and General Counsel of the Federal Reserve Bank of New York (“New York Fed”) Michael Held urged firms to prepare for the transition from LIBOR to an alternate interest rate. He cautioned that the transition from LIBOR has been identified by the Financial Stability Oversight Council as a financial stability risk. Mr. Held stated that “[t]he gross notional value of all financial products tied to U.S. dollar LIBOR is approximately $200 trillion – about 10 times U.S. GDP.” He further reported that approximately 95 percent of LIBOR exposure is in derivatives contracts.

In remarks at the SIFMA Compliance and Legal Society luncheon, Mr. Held stated that market participants with LIBOR exposure must undertake two tasks: (i) begin using the Secured Overnight Financing Rate (“SOFR”) or another robust alternative to LIBOR (or make sure that new contracts have workable fallback language) and (ii) deal with the “trillions of dollars of existing contracts that extend past 2021” which don’t currently have a sufficient fallback. According to Mr. Held, understanding the scope of an institution’s exposure to LIBOR-based products, and the contractual impact on those products when LIBOR is no longer available, is an important risk management assessment that should be completed as soon as possible.

UK and U.S. Swaps Regulators Agree to Maintain Existing Arrangements Post-Brexit

In a Joint Statement, the Bank of England (“BoE”), the Financial Conduct Authority (“FCA”) and the CFTC said that the United Kingdom’s withdrawal from the European Union would not serve to disrupt existing agreements as to the regulation, or exemptions from regulation, of firms engaged in the trading or clearing of derivatives.

The parties said that:

  • by the end of March 2019, the BoE, FCA and CFTC will put in place “information-sharing and cooperative arrangements to support the effective cross-border oversight of derivatives markets and participants and to promote market orderliness, confidence and financial stability”;
  • post-Brexit, U.S. trading venues, firms and central counterparties may continue to operate in the United Kingdom on the same basis that they do today; and
  • post-Brexit, the CFTC intends to issue new no-action letters and orders to permit UK firms to continue to operate in the United States on the same basis that they do today.

The notes to the document provide a “non-exhaustive list” of existing cooperation documents among the BoE, FCA and CFTC that will require amendment or reaffirmation post-Brexit.

 

SEC Proposes Greater Flexibility on Communications with Institutional Investors

The SEC proposed a new rule and related amendments that would allow issuers to communicate with certain potential investors to determine whether such investors might be interested in a “contemplated registered securities offering.” Under the proposed rule, such communications would be exempt from restrictions imposed by Securities Act Section 5.

The proposal is intended to give more flexibility to issuers regarding their communications with institutional investors. According to the SEC, the proposal would expand the “test-the-waters” accommodation to all issuers, including investment company issuers. The accommodation is currently only available to emerging growth companies. Under the proposal:

  • there would be no filing or legending obligations;
  • “test-the-water” communications must not be at odds with material information in the related registration statement; and
  • issuers that are subject to Regulation FD would be obligated to consider whether any information in a “test-the-water” communication would lead to disclosure obligations under Regulation FD.

Comments must be received by the SEC no later than 60 days after the date of publication of the proposal in the Federal Register.

CFTC Commissioners Urge Bank Regulators to Change to Leverage Ratio Treatment of Cleared Derivatives

Four Commissioners of the CFTC urged U.S. banking regulators to amend the calculation of the supplementary leverage ratio in order to recognize client-posted initial margin in cleared derivatives. The Commissioners’ comments came in response to a rule proposal by the banking regulators to update the calculation of derivative contract exposure amounts under the regulatory capital rules, previously covered here.

In a comment letter, CFTC Commissioners Dan Berkovitz, Rostin Behnam and Brian Quintenz said that the banking regulators (the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency) neglected to acknowledge the “risk-reducing impact” of client initial margin that the clearing member banking organization holds on behalf of clients. The Commissioners contended that a supplementary leverage ratio (“SLR”) calculation that permits initial margin to offset potential future exposures would eliminate an unnecessary impediment to banks offering client clearing services.

According to the Commissioners, the adoption of the standardized approach for counterparty credit risk (SA-CCR) without offset will:

  • “maintain or increase the clearing members’ SLRs by more than 30 basis points on average”;
  • continue to “disincentivize clearing members” from supplying clearing services; and
  • limit access to clearing in “contravention of G20 mandates and Dodd-Frank.”

Commissioner Dawn Stump recused herself from providing commentary on the proposed rule.

OFAC Imposes Additional Venezuelan Sanctions

The U.S. Treasury (“Treasury”) Department Office of Foreign Assets Control (“OFAC”) designated five officials affiliated with “illegitimate former” Venezuelan President Nicolas Maduro, pursuant to Executive Order 13692. According to OFAC, these five individuals “continue to repress democracy and democratic actors in Venezuela and engage in significant corruption and fraud against the people of Venezuela.” The individuals include Manuel Salvador Quevedo Fernandez, the “illegitimate President” of Venezuela’s state-owned oil company, Petróleos de Venezuela, S.A.

Treasury stated that it may continue to sanction officials “who have helped the illegitimate Maduro regime repress the Venezuelan people.” As a result of OFAC’s action, all property and interests in property of the designated individuals subject to U.S. jurisdiction are now blocked, and U.S. persons generally are prohibited from engaging in any dealings with them.

OCC Proposes Amending Company-Run Stress Testing Requirements

The Office of the Comptroller of the Currency (“OCC”) proposed amending the OCC’s company-run stress testing requirements for national banks and federal savings associations. The proposal is consistent with section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act. Comments on the proposal must be submitted by March 14, 2019.

The proposal would, among other things:

  • increase the minimum threshold for national banks and federal savings associations to conduct stress tests from $10 billion to $250 billion;
  • reduce the frequency with which certain banks would be obligated to conduct stress tests; and
  • cut the number of required stress testing scenarios from three to two.

SEC Commissioner Hester Peirce Describes Regulatory Challenges Posed by Cryptocurrency

In remarks at the University of Missouri School of Law, SEC Commissioner Hester Peirce described the difficulty in applying securities laws in general, and the Howey test in particular, to virtual currency and initial coin offerings. Ms. Peirce expressed concern that the SEC’s application of the Howey test will be “overly broad,” stating that token offerings do not always resemble traditional securities offerings. Some cryptocurrency projects may be unable to proceed because they cannot comply with applicable securities regulations, she said. In addition, she encouraged a “delay in drawing clear lines” for the regulation of virtual currency transactions which may provide more freedom for the technology to develop. Ms. Peirce noted that the SEC staff is working on “supplemental guidance” to “help people think through whether their crypto-fundraising efforts fall under the securities laws.”

Ms. Peirce stated that regulators tend to be unenthusiastic about innovation, given that it forces unwanted adjustments on them, as well as the possibility of negative consequences that are difficult to predict. The Commissioner said that the SEC must be open to innovation, given its potential to make our “lives easier, more enjoyable and more productive.” She raised a number of questions as to regulatory changes that might be considered in light of new technology; changing the ways in which firms communicate with their investors, for example, or revising the SEC’s recordkeeping rules.

Ms. Peirce also praised the SEC’s new office of “Small Business Capital Formation” and its first Advocate, Martha Miller.

Lofchie Comment: It’s a great thing when we have regulators who are thoughtful about the exercise of regulatory power, and are willing to weigh in a public forum the benefits and detriments of the use of that power. (I look forward, even if it requires quite a long look forward, to seeing her on late night television talk shows.)

Senator Elizabeth Warren Questions Federal Reserve Board on Bank Merger Approvals

In a letter to Federal Reserve Board (“FRB”) Chair Jerome Powell, Senator Elizabeth Warren (D-MA) raised questions about the FRB’s approval process for bank mergers and acquisitions (“M&A”). Ms. Warren first wrote to the FRB about its review of bank mergers in April 2018.

Ms. Warren voiced concern about FRB’s high rates of M&A application approvals. She also expressed concern about the FRB’s practice of allowing consultations between FRB staff and M&A applicants, which raise “questions about transparency and fairness.”

Ms. Warren’s letter was released after SunTrust Banks, Inc. and BB&T Corporation announced an agreement to merge, which would create the sixth-largest U.S. bank. Ms. Warren stated that the FRB’s record of “summarily” approving all M&A requests could have substantial impacts on consumer choice and competition.

Ms. Warren requested answers to her questions on the factors underlying increased bank M&A activity by February 21, 2019.

Lofchie Comment: Senator Warren’s concerns as to the percentage of bank merger applications that are approved totally misses the point, at least if the point is good financial regulation. If the regulators are (i) transparent as to what the standards are and (ii) consistent in the application of those standards, then it follows that a very high percentage of applications will be approved. Market participants know what the rules are. Conversely, if the regulators are opaque as to the standards, and if application of those standards is inconsistent (in other words, if the regulatory system is not working well), the percentage of applications approved may be much lower because the regulators are being more arbitrary in their exercise of power.

Senator Warren should focus on the standards by which approvals are granted and not on the percentage of applications granted.

CFPB Proposes Rescinding Provisions of Payday Lending Rule

The Consumer Financial Protection Bureau (“CFPB”) proposed rescinding the mandatory underwriting provisions of a final rule governing “Payday, Vehicle Title and Certain High-Cost Installment Loans.” Additionally, the CFPB proposed to delay the compliance date for the mandatory underwriting provisions of the final rule (originally August 19, 2019) until November 19, 2020.

The CFPB proposed to rescind:

  • the “identification” provision, which establishes that it is an “unfair and abusive practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans”;
  • the “prevention” provision, which creates underwriting requirements for these loans to prevent the “unfair and abusive practice”;
  • the “conditional exemption,” for particular covered short-term loans;
  • the “furnishing” provisions, which obligate lenders who are making covered short-term or longer-term balloon-payment loans to “furnish certain information regarding such loans to registered information systems”; and
  • the parts of the recordkeeping provisions that are associated with the mandatory underwriting requirements.

The CFPB also proposed to rescind the Official Interpretations linked to these five provisions. Comments on the proposal to rescind the mandatory underwriting provisions must be submitted no later than 90 days following publication of the proposal in the Federal Register.

Comments on the proposal to delay the compliance date for mandatory underwriting provisions of the final rule must be submitted no later than 30 days following publication of the proposal in the Federal Register.

Lofchie Comment: The CFPB’s payday lending requirements seem intended as much to prevent payday lending by imposing regulations that are impractical to follow.  The policy question is whether this effective prohibition is good for those who actually need to borrow money or whether government’s protective or prohibitive policies hurt those whom it purports to help. This is not an easy question, but query whether the CFPB really tried to answer it before it adopted its anti-payday lending rules. See also CFPB Imposes Stricter Rules for Payday Lending.