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.

SEC Staff Comment on Suspension of Trading of Virtual Currency Tracking Certificates

The SEC Division of Trading and Markets and Division of Corporation Finance (the “Divisions”) commented on the SEC’s September 9th Order temporarily suspending trading of certain bitcoin and ether tracking certificates. The Divisions asserted that the lack of accurate and consistent information pertaining to Bitcoin Tracker One and Ether Tracker One (together, the “certificates”) led to confusion amongst market participants. The Divisions cautioned market participants that seek to quote, trade, or facilitate transactions in the certificates to examine the legal and regulatory implications of doing so. The SEC staff is currently working with the CFTC staff in connection with the regulatory considerations relevant to the certificates under the Commodity Exchange Act.

President Trump to Nominate Member of the Board of Governors of the Federal Reserve System

President Donald J. Trump intends to nominate Jean Nellie Liang as a Member of the Board of Governors of the Federal Reserve System (“FRB”). Ms. Liang is a Senior Fellow in Economic Studies at the Brookings Institution and a Visiting Scholar at the International Monetary Fund’s Monetary and Capital Markets Department.

Ms. Liang previously worked at the FRB as Director of the Division of Financial Stability. Prior to joining the FRB, Ms. Liang was a member of the Congressional Budget Office’s Panel of Economic Advisors and a lecturer at the Yale School of Management.

SEC Commissioner Peirce Calls on SEC to Embrace Innovation and Allow Cryptocurrency Risk-Taking

SEC Commissioner Hester M. Peirce urged the SEC to embrace FinTech innovation and permit more risk-taking by investors in cryptocurrencies.

In remarks before the Cato Institute’s FinTech Unbound Conference, Ms. Peirce elaborated on her dissent from the SEC’s rejection of an exchange-traded product (“ETP”) that was designed to give investors exposure to bitcoin. Ms. Peirce explained her disagreement with the SEC’s decision to deny an exchange’s bid to list shares of the Winklevoss Bitcoin Trust (see previous coverage), asserting that “it seemed to turn on the Commission’s assessment of bitcoin rather than on the exchange’s plans for trading the [ETP].” She went on to state:

“The focus on the lack of regulation of cryptocurrencies particularly troubled me. What authority do we have to require that assets underlying securities be regulated as if they were securities? Even if we had this authority, private markets can and do regulate themselves.”

Ms. Peirce urged the SEC to:

  • avoid the temptation to replace the market’s product testing with the agency’s own and allow investors to determine the value of these innovations for themselves;
  • create a space for innovation to occur in SEC-regulated markets or accept that investors will seek out innovations in less regulated markets;
  • establish an environment in which investors can openly communicate with the SEC and its staff; and
  • reaffirm the agency’s commitment to expanding investor access, including through innovative technologies.

Lofchie Comment: Ms. Peirce’s speech is witty and thoughtful.

SEC Commissioner Criticizes Recent SEC Actions Relating to Proxy Advisors

SEC Commissioner Robert J. Jackson Jr. urged the SEC to preserve the current role of proxy advisors in shareholder voting. He asserted that the SEC should focus on the low rate of proxy votes by retail investors and the need for improved technology around proxy voting.

In a public statement, Mr. Jackson criticized the SEC’s recent decision to withdraw two no-action letters providing protection to investment advisers that receive or use proxy advice (see previous coverage). Mr. Jackson contended that there is “little proof” that proxy advisors hold “too much power,” which has been a frequent argument for reform of proxy advisor regulation. The decline of retail investor participation in corporate elections over the last decade is far more worrisome, he said, and should be addressed.

Lofchie Comment: Commissioner Jackson’s statement on proxy advisors raises many questions, particularly when compared to his position on proposed Regulation Best Interest.

In the context of arguing that proposed Regulation Best Interest was insufficiently tough, Mr. Jackson asks: “Will investors understand the implications of what they [read?] . . . To what degree will investors actually use that information when making the crucial decision as to who to trust with their money?”

These concerns seem absent from the Commissioner’s statement on proxy advisors.

If retail investors are essentially not capable of making investment decisions based on recommendations from full-service broker-dealers, as Commissioner Jackson implies, why would these same investors be capable of making informed and significant votes in proxy contests? Put more bluntly, why does it matter whether retail investors vote in proxy contests given their very limited ability to make investment decisions?

As to proxy advisors, Commissioner Jackson says the following: “It’s hard to imagine . . . that investors receiving too much advice about how to vote their shares—advice they are free to, and often do, disregard—should be at the top of our [worries] list.” If the provision of too much proxy advisor advice is not a problem, and investors are readily capable of disregarding it, then why would recommendations provided by full service brokers be problematic?

If full-service broker-dealers are not capable of providing useful recommendations due to their conflicts of interest, why would proxy advisors who may have conflicts of interests be capable of giving impartial investment advice? What conflicts of interest are acceptable for proxy advisors?

Some clarification may be needed to address these apparent inconsistencies.

President Signs Executive Order to Impose Sanctions in the Event of Foreign Interference in U.S. Elections

President Donald J. Trump signed an Executive Order (“E.O.”), dated September 12, 2018, directing intelligence and law enforcement agencies to assess foreign interference in U.S. elections, and authorizing sanctions against foreign persons found to have engaged in, assisted or otherwise supported such activity.

In Section 1 of the E.O., President Trump established a multi-step process for assessing and evaluating the involvement of a “foreign government, or any person acting as an agent of or on behalf of a foreign government” in actual or attempted interference in a U.S. election. The initial assessment, to be conducted by the Director of National Intelligence in consultation with other agencies, is to be done within 45 days after the conclusion of an election. During the subsequent 45-day period, the Attorney General and the Secretary of Homeland Security, in consultation with others, are to deliver to the President, the Secretary of State, the Secretary of the Treasury and the Secretary of Defense a report evaluating (i) the extent to which foreign interference materially affected election infrastructure, vote tabulation or the timely transmission of results, and (ii) the extent to which such interference materially affected the security or integrity of infrastructure related to political candidates, campaigns, and other political organizations.

Section 2 of the E.O. authorizes the imposition of blocking sanctions against foreign persons determined (i) to have directly or indirectly engaged in, sponsored, concealed or otherwise been complicit in foreign interference in a U.S. election; (ii) to have materially assisted, sponsored or otherwise supported such interference, or to have supported any person sanctioned in connection with such interference; or (iii) to be owned or controlled by, or to have acted or to have purported to act for or on behalf of, any person sanctioned under the E.O. Section 2 also notes that two Obama-era E.O.s remain in effect, which provide additional authorities for sanctions in connection with election-related and certain other “malicious cyber-related activities.”

Section 3 of the E.O. directs the Secretary of the Treasury, in consultation with others, to recommend to the President a range of potential sanctions – from complete blocking, to restrictions on the extension of credit, to a prohibition on dealings in equity or debt – against “the largest business entities licensed or domiciled in a country whose government authorized, directed, sponsored, or supported election interference,” including at least one entity from each of the finance, defense, energy, technology and transportation sectors.

CFTC Opens Registration for First FinTech Conference

Registration for the upcoming CFTC Conference: “FinTech Forward 2018: Innovation, Regulation and Education” is now open. The conference, which is scheduled to take place from October 2, 2018 to October 4, 2018, will feature CFTC Chair Christopher J. Giancarlo and U.S. Representative Austin Scott (R-GA), among others.

The conference will focus on significant tech-driven developments in the financial markets. Participants will discuss (i) the impact that new technologies may have on markets and customers, and (ii) what regulators ought to do to help identify emerging opportunities, challenges and risks, as well as to better educate market participants.

CFTC Chair Touts Cross-Border Regulatory Deference as Best Alternative

CFTC Chair J. Christopher Giancarlo called on European Union (“EU”) regulators to “commit to an equivalence determination process that focuses on achieving comparable regulatory outcomes and not rule-by-rule exactitude.” In a speech at the Eurofi Financial Forum, Mr. Giancarlo highlighted the importance of U.S. deference toward non-U.S. regulators as to their control over markets and market participants within their jurisdiction; he called on EU policymakers and regulators to adopt a similarly deferential approach to the cross-border application of European swaps regulation to U.S. markets and market participants.

Mr. Giancarlo previewed a forthcoming white paper that will offer recommendations on the application of the agency’s swap rules to cross-border activities. He criticized current EU legislative proposals that raise doubts with respect to the continuance of the policy of cross-border deference and cautioned that failing to adopt an approach of cross-border deference would “turn [global regulation] down that very different path of overlapping and confounding cross-border regulation with its high regulatory cost and constraints on economic growth.”

Lofchie Comment: When he was the CFTC’s Chair, Mr. Gensler asserted that the United States would adopt rules governing the global derivatives markets and market participants, and that Europe would just have to accept that reality. Europe didn’t. Asia didn’t. Joint Cautionary Letter from the EU, France, Japan and the UK to the CFTC on U.S. Cross-Border Swaps Regulation (with Lofchie Comment). Mr. Gensler was being very aggressive. The hand he played was not helped by the fact that the CFTC’s regulations were not so great. The rest of the world responded with a collective no thanks.

Current CFTC Chair Giancarlo is reversing course. It does not make sense for the CFTC to attempt to regulate European and Asian markets. But how will Europe react? Chair Giancarlo suggests that, however Europe acts, the United States will respond in kind.

Senate Confirms New CFTC Commissioners

The U.S. Senate confirmed new CFTC Commissioners Republican Dawn DeBerry Stump and Democrat Dan Berkovitz.

Ms. Stump worked previously as Executive Director of the Americas Advisory Board at the FIA. Before that, she served as a senior professional staff member of the U.S. Senate Committee on Agriculture, Nutrition and Forestry.

Mr. Berkovitz was previously a partner and Co-Chair of the Futures and Derivatives Practice at Wilmer Cutler Pickering Hale and Dorr LLP. Before that, he served as a General Counsel for the CFTC, and in various other governmental positions.

SEC Chair Summarizes Recent Efforts to Promote Capital Formation

In a speech at the Nashville 36|86 Entrepreneurship Festival, SEC Chair Jay Clayton outlined recent agency efforts to encourage capital formation for public companies and companies that are considering going public.

Mr. Clayton highlighted three specific categories of SEC actions: (i) a scaled disclosure framework for smaller companies (including adjusting the thresholds for companies deemed to be “smaller reporting companies” and eligible to provide more limited “scaled disclosures”), (ii) disclosure modernization and simplification (i.e., revising GAAP and S-K disclosure requirements to minimize duplication) and (iii) staff guidance to facilitate the initial public offering (“IPO”) process.

Mr. Clayton suggested that the SEC undertake a review of the current framework for exempt offerings. In particular, he stated that the SEC should:

  • examine the “complexity” of the current exemption framework for issuers and investors, and decide on changes to streamline it;
  • consider whether rules regarding who can invest in certain offerings should be expanded to focus on criteria such as the sophistication of the investor and the specific amount of the investment; and
  • permit issuers to transition more readily from one exemption to another, or to a public offering.

Mr. Clayton also discussed the SEC’s approach to distributed ledger technology, digital assets and initial coin offerings. He asserted that efforts in those particular areas reflect the two abiding principles of the SEC: (i) embrace new technologies that reduce costs while also offering new investment opportunities and (ii) require that retail investors have access to necessary information to make sound investment decisions.

OCC Proposes New CRA Regulatory Framework

In a notice of proposed rulemaking, the Office of the Comptroller of the Currency (“OCC”) requested feedback on the ways it could modernize the Community Reinvestment Act (“CRA”) regulatory framework. Comments must be submitted within 75 days after publication in the Federal Register.

In response to requests to reform the CRA, the OCC reported that it is considering amending the regulations that implement the CRA, which serves to assist insured depository institutions in “meet[ing] the credit needs of their communities, including low- and moderate-income . . . neighborhoods.” The OCC will consider feedback on ways to amend the CRA framework in order to (i) better serve the CRA’s intended purpose, (ii) increase lending and investment in underserved areas, and (iii) reduce the reporting and CRA performance assessment burden.