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.
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.
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.
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.
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.
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.)
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.
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.
The Financial Conduct Authority (“FCA”), the European Securities and Markets Authority (“ESMA”) and other EU securities regulators agreed to two Memoranda of Understanding (“MoUs”) regarding the activities of credit rating agencies, trade repositories and asset managers. These MoUs would be effective only if UK and EU authorities fail to reach an agreement over Brexit.
The multilateral MoU with the FCA, the EU and European Economic Area (“EEA”) National Competent Authorities (i) includes “supervisory cooperation, enforcement and information exchange” and (ii) allows the regulators to access information on, “amongst others, market surveillance, investment services and asset management activities.” The MoU allows certain activities, such as fund manager outsourcing and delegation, to continue to be carried out by UK-based entities on behalf of counterparties based in the EEA. For the funds industry, the MoU provides certainty to firms that delegate fund management to UK asset managers.
The MoU, with the FCA and ESMA, concerns information regarding the supervision of credit rating agencies and trade repositories. The MoU paves the way to allow EU counterparties to continue using those trade repositories.
New York State Department of Financial Services (“NYDFS”) Superintendent Maria Vullo reminded NYDFS-regulated entities that they must be in full compliance with the requirements of the NYDFS’s cybersecurity regulation by March 1, 2019.
The NYDFS cybersecurity regulation requires banks, insurance companies and other institutions regulated by the NYDFS (“covered entities”) to implement a cybersecurity program to protect consumer data (see previous coverage). The NYDFS cybersecurity regulation went into effect on March 1, 2017, subject to a two-year implementation timeline. The final step in the implementation timeline requires covered entities to adopt policies governing arrangements with third-party providers that have access to firms’ nonpublic information. The NYDFS also reminded firms to file a certificate of compliance for the prior calendar year by February 15, 2019.
Lofchie Comment: As previously described, the NYDFS rules are open-ended, complex and burdensome and will result in creating many new ways for the government to collect fines when something goes wrong.