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.

President Trump Imposes Additional Sanctions on Venezuela

President Donald J. Trump issued an Executive Order (“E.O”) prohibiting certain financial transactions with the government of Venezuela. President Trump cited the Maduro regime’s recent activities, which include “attempts to undermine democratic order by holding snap elections that are neither free nor fair” – a reference to the presidential elections held on May 20.

The transactions prohibited by the E.O. include, among others, any dealings in the United States or by U.S. persons related to:

  • the purchase of debt owed to the Government of Venezuela, including accounts receivable;
  • debt owed to the Government of Venezuela that, after the effective date of the E.O., is pledged as collateral, including accounts receivable; and
  • the sale, transfer, assignment or pledging as collateral by the Government of Venezuela of any equity interest in which the Government of Venezuela has 50 percent or greater ownership interest.

As with previous Venezuela-related Orders, including E.O. 13692, E.O. 13808 and E.O. 13827, the “Government of Venezuela” is defined broadly to cover not only political subdivisions and agencies, but also companies and other entities – including the state-owned oil company Petroleos de Venezuela S.A. (“PdVSA”) – that are owned or controlled by, or acting for or on behalf of, the Government of Venezuela.

CFTC Issues Guidance to Exchanges and Clearinghouses on Virtual Currency Derivative Product Listings

The CFTC issued staff guidance to exchanges and clearinghouses to “ensure proper surveillance and oversight of the trading and clearing of virtual currency contracts.”

The CFTC stated that virtual currencies “are unlike any commodity that the CFTC has dealt with in the past.” The CFTC cited heightened risks and a lack of transparency and susceptibility to market manipulation as causes for concern about how virtual currency derivative products may impact the commodities markets. As a result of these risks, the CFTC identified several areas that demand greater attention from designated contract markets (“DCMs”), swap execution facilities (“SEFs”) and derivatives clearing organizations (“DCOs”). As described in the advisory, the CFTC set the following expectations:

  • Enhanced Market Surveillance. The CFTC expects exchanges to enter into information-sharing agreements with spot markets for virtual currency products in order to facilitate access to trade data. The CFTC heightened its expectations for the monitoring of “relevant data feeds” from the underlying spot markets. The CFTC expects that exchange-listed virtual currency contracts should be based on spot markets that adhere to federal anti-money laundering regulations.
  • Close Coordination with the CFTC Surveillance Group. The CFTC expects exchanges to regularly coordinate with CFTC staff regarding the surveillance of virtual currency derivative contracts, provide certain trade data to CFTC staff upon request, and coordinate with staff regarding the timing of new virtual currency derivative listings.
  • Large Trader Reporting. The CFTC recommends that exchanges implement a large trader reporting threshold for virtual currency derivative contracts at “five bitcoin” or the “equivalent for other virtual currencies.” This threshold could help to better identify traders who are engaging in virtual currency-related market manipulation.
  • Outreach to Members and Market Participants. The CFTC expects exchanges to “meaningfully” engage with stakeholders in the lead-up to new virtual currency derivative product listings. This includes the expectation that exchanges will solicit comments from stakeholders not only on contract terms and vulnerability to market manipulation, but also on the impact on clearing members and futures commission merchants. The CFTC also expects exchanges to share feedback from market participants with CFTC staff.
  • DCO Risk Management. The CFTC expects a DCO to submit to CFTC staff proposed initial margin requirements and other relevant information concerning a proposed virtual currency derivative contracts. CFTC staff also expects DCOs to explain their consideration of stakeholders’ views in approving proposed contracts.

The CFTC explained that in the event that a self-certified virtual currency derivative contract raises concerns, the CFTC will provide a notice to the exchanges regarding its concerns as to compliance with the CEA and CFTC rules.

SEC Commissioner Explains Approach to Enforcement Actions

SEC Commissioner Hester M. Peirce explained her reasoning for often voting against enforcement recommendations, arguing that although enforcement is an important tool for the SEC, it should not act as an enforcement agency.

In remarks at the 50th Annual Rocky Mountain Securities Conference, Ms. Peirce outlined three considerations guiding her approach to enforcement actions. First, Ms. Peirce asserted that the SEC should use the other tools at its disposal before using enforcement resources, especially in cases of minor violations. According to Ms. Peirce, the “broken-windows approach,” in which minor violations are vigorously pursued, does not serve the SEC’s goals or purpose. She argued that the Office of Compliance Inspections and Examination (“OCIE”) should prioritize keeping an open, productive relationship with private parties, and avoid using enforcement to settle matters. According to Ms. Peirce, the “broken-windows approach” causes negative effects, such as:

  • diverting the SEC’s limited resources away from high-priority issues;
  • discouraging regulated entities from contacting the SEC for help concerning compliance;
  • rewarding SEC staff for the number of cases brought rather than the quality of the cases;
  • increasing an unhealthy capital formation environment by dissuading companies from considering an IPO; and
  • imposing “unwarranted costs on companies and individuals.”

Ms. Peirce advocated the use of other resources including the OCIE, investor education and advocacy, the PAUSE program, guidance and rulemaking instead of enforcement.

Second, Ms. Peirce stated that due process considerations should inform the SEC’s enforcement approach. Ms. Peirce said she witnessed: (i) attempts to bypass the Administrative Procedure Act by using the enforcement process to make policy, (ii) rushed settlements that set legal precedents, (iii) unnecessarily extended investigations and (iv) attempts to encourage people to waive attorney-client privilege.

Third, Ms. Peirce warned against the unintended consequences of enforcement actions, particularly as they relate to the work of chief compliance officers (“CCOs”). According to Ms. Peirce, imposing liability on CCOs dissuades people from taking on those roles and places unnecessary blame on them. Additionally, Ms. Peirce criticized the use of civil penalties against corporations, which are often paid by the company’s shareholders instead of by responsible actors.

Lofchie Comment: SEC Commissioner Peirce’s remarks should be the starting point for a real dialogue about the future of the SEC.

Section 2(b) of the Securities Act provides, “Whenever . . . the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.”

The SEC ought to be considering whether its rules, and the way that it enforces those rules, make for a good economy. Too often it seems that the SEC’s only measures of success are the dollar amount of the fines that it collects and the number of sanctioned entities. This is not to disparage the importance of enforcement, but if the SEC’s only measure of effectiveness is enforcement, then Congress should create a new regulator to focus on capital formation and the economy. (In this way, Commissioner Peirce’s remarks have relevance well beyond the bounds of the SEC.)

Ms. Peirce pushes us to consider fundamental questions about the purpose of the Commission, and how far afield it has strayed from that purpose. It’s about time.

FRB Vice Chair Urges Reconsideration of Capital and Liquidity Requirements for Foreign Banks Operating in U.S.

Board of Governors of the Federal Reserve System Vice Chair for Supervision Randal K. Quarles encouraged regulators to reconsider the capital and liquidity requirements for foreign banks operating in the United States. He also proposed a return to the pre-financial crisis regulatory goal of maximizing the flow of capital worldwide.

In an address at Harvard Law School, Mr. Quarles stated that the current U.S. approach to foreign banks, which prioritizes increasing the resiliency of their U.S. operations, should be reconsidered. He argued that the events of the last financial crisis, when foreign banks recovered through the combined efforts of the United States and their home country governments, created the current U.S. approach, which prioritizes ensuring that the United States has sufficient resources to address another such event. He stated that while most regulators seem to believe that intermediate holding company (“IHC”) and attendant requirements are appropriate, the regulation of the IHC could be modified without harming financial stability. He suggested that if the United States recalibrated its requirements, other jurisdictions would, too. This outcome, he argued, would increase the flow of capital, which should be the goal of regulators.

CFPB Reviews Spring 2018 Rulemaking Agenda

The Consumer Financial Protection Bureau (“CFPB”) listed “the regulatory matters that the Bureau reasonably anticipates having under consideration during the period from May 1, 2018, to April 30, 2019.” This agenda is part of the Spring 2018 Unified Agenda of Federal Regulatory and Deregulatory Actions. The notice outlined Acting CFPB Director Mick Mulvaney’s leadership priorities.

In a blog post, the CFPB explained that it intends to reopen rulemaking regarding two prior regulations: (i) the implementation of the Home Mortgage Disclosure Act, regarding, among other aspects, the “institutional and transactional coverage tests and the rule’s discretionary data points” and (ii) the Payday, Vehicle Title, and Certain High-Cost Installment Loans rule before their compliance dates in August 2019. The CFPB plans to maintain certain other rulemakings that were previously implemented.

The CFPB also set out its agenda for proposed rules and guidance. Among other things, the agency noted that it would attempt to reduce any “unwarranted regulatory burden.” The CFPB intends to:

  • propose a rule to improve communication practices and consumer disclosures of collectors under the Fair Debt Collection Practices Act;
  • require financial institutions “to collect, report and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses”; and
  • open rulemaking to address mortgage requirement issues under the Dodd-Frank Act.

The CFPB also listed its potential long-term actions (beyond the next 12-month period) and reclassified certain rulemakings as “inactive.” Regulation Z subparts B and G, which concern the extension of credit under the Truth in Lending Act, will be moved to the long-term actions list.

Lofchie Comment: Mr. Mulvaney’s rethinking of Mr. Cordray’s policies illustrates the potential benefits of reconstituting the CFPB from being a bureau led by a single partisan individual to a commission with representatives of both major political parties. With a five-person commission, if the chair of the commission attempts to obtain unanimous votes on new rules, it is far more likely that those rules will reflect a consensus that is likely to survive elections.

House of Representatives Repeals CFPB Auto-Loan Financing Regulatory Guidance

The House of Representatives voted to withdraw the Consumer Financial Protection Bureau (“CFPB”) regulatory guidance on auto-loan financing using Congressional Review Act (“CRA”) authority. The Joint Resolution passed the House by a vote of 234 to 175 and was sent to the President for his signature.

As previously covered, this guidance, although not a formal rule, allowed the CFPB to pursue legal claims against car dealerships that allegedly charged minority consumers higher interest rates on their auto loans. The CFPB avoided the Administrative Procedures Act’s rulemaking process and related requirements by enforcing this regulatory guidance rather than developing a rule.

In remarks before the House of Representatives, House Financial Services Committee Chairman Jeb Hensarling (R-TX) supported the repeal, alleging that the CFPB’s application of the guidance violated (i) Dodd-Frank Section 1029, which prohibits the CFPB from regulating auto dealers, and (ii) the Administrative Procedures Act, by issuing guidance rather than adhering to the designated rulemaking process.

Representative Maxine Waters (D-CA) argued against the repeal and asserted that the guidance (i) served its intended purpose by providing “clarity to indirect auto lenders,” and (ii) regulated auto lenders, not dealers. Ms. Waters further claimed that using the CRA to repeal this guidance is a “clear overreach,” and that the CRA was not designed to serve this purpose.

Lofchie Comment: Notwithstanding Rep. Waters’ dramatic statement, if the guidance is less than a rule, then use of the CRA to withdraw the guidance should be less impactful than use of it to withdraw a rule. The power to do the greater implies the power to do the lesser.  

President Trump Ends U.S. Participation in JCPOA, Reinstitutes Sanctions against Iran

President Donald J. Trump declared that the U.S. would end its involvement in the Joint Comprehensive Plan of Action (“JCPOA”) and ordered the reinstitution of U.S. sanctions against Iran.

The President ordered the Secretary of State and the Secretary of the Treasury to “re-impose all United States sanctions lifted or waived in connection with the JCPOA.” The Department of the Treasury Office of Foreign Assets Control (“OFAC”) will (i) “revoke, or amend, as appropriate” all general and specific licenses that were issued in connection with the JCPOA, (ii) issue new authorizations to ensure the wind-down of transactions and activities that relate to the removed or amended general and specific licenses, and (iii) institute pre-JCPOA sanctions at the end of the 90-day and 180-day wind-down periods. OFAC provided additional FAQs to provide guidance on the re-imposition of sanctions.

SEC Commissioner Michael Piwowar Resigns

SEC Commissioner Michael S. Piwowar submitted his resignation letter to President Donald J. Trump. Dr. Piwowar’s resignation will go into effect on July 7, 2018 (or earlier upon the swearing in of a successor).

Dr. Piwowar was appointed to the Commission by President Obama in 2013 and briefly served as Acting SEC Chair under President Trump. Before that, he served as the Republican chief economist for the U.S. Senate Committee on Banking, Housing and Urban Affairs under Senators Mike Crapo (R-ID) and Richard Shelby (R-AL). He also served in the White House as a senior economist at the President’s Council of Economic Advisers from 2008 to 2009 under both President Bush and President Obama.

Prior to joining the White House, Dr. Piwowar worked as a Principal at the Securities Litigation and Consulting Group, and at the SEC Division of Economic and Risk Analysis (previously, the Office of Economic Analysis) as a visiting academic scholar and senior financial economist.

Lofchie Comment: Commissioner Piwowar’s departure is a significant loss to the Commission. He brought to the SEC the perspective of an economist. As such, he consistently championed the relationship between a strong securities market, sensible financial regulation and economic growth.

SEC Chief Accountant Recommends Improving the Quality of Financial Reporting

SEC Chief Accountant Wesley Bricker made recommendations to improve the quality of financial reporting for regulatory agencies and firms. He also reviewed developments in non-Generally Accepted Accounting Principles (“non-GAAP”) measures and other areas.

In remarks before the Baruch College Financial Reporting Conference, Mr. Bricker encouraged standard-setting bodies to maintain distinct financial reporting frameworks for general and specific purpose reporting. He explained that general purpose financial reporting should continue to provide crucial business and financial information to shareholders while specific purpose financial reports should remain limited to a “special purpose framework” in order to address more specific needs.

Mr. Bricker identified the means by which firms can improve the quality of interim reviews and annual audits. He stated that firms should implement an “effective firm-wide (enterprise) risk management system” to enhance audit firm governance. He encouraged “independent, diverse thinking” on audit committees in order to improve corporate governance. He emphasized the importance of improving the “tone and culture” of the company in enabling auditors to accomplish their work.

Mr. Bricker mentioned that the SEC is issuing a request for public comment to address compliance challenges related to auditor independence rules. Mr. Bricker promised that amendments to the accounting standards will significantly improve the quality of financial reporting for investors. The amendments include: (i) requiring calendar year-end public companies to report revenue from contracts with customers; (ii) standardized company reporting requirements to help investors compare financial statements across companies; (iii) improving reporting and disclosures of non-GAAP and GAAP to help investors identify how management monitors performance and analysis; and (iv) enhancing the quality of disclosures as to market risk.

CFTC Commissioners Have Different Wish Lists

In separate remarks at the FIA 40th Annual Law and Compliance Conference, CFTC Commissioners Brian Quintenz and Rostin Behnam described their respective regulatory priorities in contrasting terms.

Commissioner Quintenz advocated for concerted efforts to accomplish harmonization between SEC and CFTC swap regulation. According to Mr. Quintenz, firms that register as both swap dealers and securities-based swap dealers with the CFTC and the SEC, respectively, should be subject to different regulatory requirements only when there are “irreconcilable difference[s] between the securities and derivatives markets.” Further, Mr. Quintenz emphasized the importance of pushing for full harmonization where possible, noting that small differences often lead to a large cost for compliance. As to CPO/CTA registration for registered investment advisers, SEFs and data reporting, Mr. Quintenz argued that deference to the rules of the other agency may be appropriate. A firm engaged in trading and reporting swaps and security-based swaps should follow “one set of rules, instead of two,” he argued.

While Commissioner Behnam also spoke about SEC/CFTC harmonization, he emphasized more broadly that CFTC Chair J. Christopher Giancarlo’s agenda for regulatory change was overly ambitious. In Mr. Behnam’s words:

We’ve been waiting for deliverables in terms of Project KISS, Reg. Reform 2.0, and CFTC and SEC harmonization, and anticipating resolution of unfinished business in terms of the de Minimis exception, position limits, capital, and Regulation Automated Trading (Reg. AT). Since that time, we’ve received the Chairman’s white paper on “Swaps Regulation Version 2.0,” which purports to set the agenda for Reg. Reform 2.0. While I appreciate the Chairman’s transparency in setting forth his vision and, in his words, starting a dialogue, I can’t help but note that there is already a process for dialogue with market participants regarding potential rule changes – the notice and comment process for proposed rules under the Administrative Procedure Act. Adding another white paper just pushes back the timeline for getting to actual deliverables. It adds another step to the process. It also takes a lot of staff time when budgets are tight.

Commissioner Behnam went on to say: “If [CFTC] staff is directed to focus on reworking the broader framework for the swaps market in lieu of fine-tuning and building on the progress we’ve made since 2008, we risk creating greater uncertainty and impracticability at increased costs to market participants.”

Lofchie Comment: While one can be sympathetic to Commissioner Behnam’s skepticism of the need for regulatory change, and that such change itself can be costly, sufficient time has now passed since Dodd-Frank was adopted to evaluate many of the rule changes. Many of the rule changes have not only not produced the suggested benefits, but have had a negative impact on liquidity, have increased market fragmentation, and have materially increased costs to end users. Particularly given the tremendous speed with which the swap rules were adopted, and given that there is now sufficient data to evaluate at least some of the results that they have produced, there seems a great benefit in the rethinking suggested by Chair Giancarlo and CFTC Chief Economist Bruce Tuckman. It should also be noted that many of the observations made by Chair Giancarlo had also been raised by him when he was a Commissioner, but had not received the attention that they merited or the discussion that they deserved and now hopefully will receive.