IOSCO published a Staff Working Paper titled Crowd-Funding: An Infant Industry Growing Fast, which provides a global overview of the crowd-funding industry, along with a mapping exercise of the global regulatory landscape. The purpose of the report is to identify investor protection issues and to determine whether crowd-funding poses a systemic risk to the global financial sector.

The report analyzes financial return crowd-funding (“FR crowd-funding”), which refers to peer-to-peer lending and equity crowd-funding. According to the report, the main challenge facing regulators and governments is determining how to encourage crowd-funding, while also mitigating the risks associated with its growth and protecting investor interests. 

The working paper identifies the main benefits of FR crowd-funding as follows:

• it provides a boost to economic growth through flows of credit to SMEs and other users in the real economy;
• it fills the credit gap left by banks;
• it offers lower costs for capital/high returns, leveraging off a lower cost basis; and
• it provides a new product for portfolio diversification.

The main risks are identified as:

• risk of default;
• platform risk;
• risk of fraud;
• risk of illiquidity; and
• risk of investor inexperience.

The report concluded that the FR crowd-funding market does not present a systemic risk to the global financial sector at present, but the challenges ahead will include (i) cross-jurisdictional contractual and legal harmonization, and (ii) dispute settlement and resolution issues.

See: IOSCO Report.

The U.S. Senate Banking Committee held an open session hearing on the implementation of Dodd-Frank entitled “Oversight of Financial Stability and Data Security.” The hearing featured representatives from the Treasury, the Federal Reserve, the FDIC, the OCC, the SEC and the CFTC.

Committee Chairman Tim Johnson (D-SD) began the hearing by outlining the work that remains to be done in order to fully implement Dodd-Frank, including, among other things: (i) enhanced capital, leverage and liquidity rules for the largest banks; (ii) a new regulatory framework for non-bank financial companies designated as SIFIs; (iii) QRM; and (iv) the new derivatives rules. 

The witnesses offered timelines for completing regulatory work, and explained what their respective agencies were doing to mitigate cyber and other data security risks, including the protection of consumer data.

The following witnesses testified at the hearing:

• Mary Miller, Undersecretary for Domestic Finance, U.S. Department of the Treasury (view written testimony);
• Daniel Tarullo, Governor, Board of Governors of the Federal Reserve System (view written testimony);
• Martin Gruenberg, Chair, Federal Deposit Insurance Corporation (view written testimony);
• Tom Curry, Comptroller of the Currency, Office of the Comptroller of the Currency (view written testimony);
• Mary Jo White, Chair, Securities and Exchange Commission (view written testimony); and
• Mark Wetjen, Acting Chair, Commodity Futures Trading Commission (view written testimony).

Click here to view a webcast of the hearing. 

See: Chair Johnson’s Opening Statement; Senator Crapo’s Statement; Senate Banking Committee Announcement.
See also: OCC Release on Comptroller Curry’s Testimony; FRB Release on Governor Tarullo’s Testimony; CFTC Release on Acting Chair Wetjen’s Testimony.

The House Financial Services Committee held a full committee hearing to examine the impact of the Volcker Rule.

The following witnesses testified:

• Daniel Tarullo, Governor, Federal Reserve Board;
• Mary Jo White, Chair, Securities and Exchange Commission;
• Thomas Curry, Comptroller of the Currency, Office of the Comptroller of the Currency;
• Martin Gruenberg, Chair, Federal Deposit Insurance Corporation; and
• Mark Wetjen, Acting Chair, Commodity Futures Trading Commission. 

See also:  Archived Webcast of the Hearing; Committee Memorandum; FRB Release on Tarullo’s Statement; OCC Release on Curry’s Statement; FDIC Release on Gruenberg’s Statement; CFTC Release on Wetjen’s Statement.
Related news:  House Committee on Financial Services Hearing: Impact of the Volcker Rule on Job Creators, Part I (January 16, 2014).  

The U.S. Senate Banking Committee announced that it will hold an open session on February 6, 2014, to conduct a hearing on oversight of financial stability and data security.

The following witnesses are scheduled to appear:

• Mary Miller, Undersecretary for Domestic Finance, U.S. Department of the Treasury;
• Daniel Tarullo, Governor, Board of Governors of the Federal Reserve System;
• Martin Gruenberg, Chair, Federal Deposit Insurance Corporation (view written testimony);
• Tom Curry, Comptroller of the Currency, Office of the Comptroller of the Currency (view written testimony);
• Mary Jo White, Chair, Securities and Exchange Commission (view written testimony); and
• Mark Wetjen, Acting Chair, Commodity Futures Trading Commission (view written testimony).

The Committee will also hold an executive session hearing to consider the nominations of The Honorable Wanda Felton to be First Vice President of the Export-Import Bank of the United States, Dr. Katherine M. O’Regan to be Assistant Secretary of the U.S. Department of Housing and Urban Development, and Mr. Arun Kumar to be Assistant Secretary of Commerce and Director General of the United States and Foreign Commercial Service.

See:  Senate Banking Committee Announcement.

FINRA announced that it signed an agreement with BATS Global Markets, Inc. (“BATS”) to provide cross-market surveillance services to BATS’ four stock exchanges – BZX, BYX, EDGX and EDGA – along with certain other regulatory services.

According to the press release, this will increase the percentage of the market that FINRA surveils from 90% to 99%. 

Effective immediately, FINRA will also perform disciplinary and examination services on behalf of BATS. It is expected that BATS will be included in FINRA’s cross-market surveillance program during the first quarter of 2015.

Lofchie Comment:  The fact that FINRA now has an effective monopoly on “self-regulation” raises an interesting question as to the whole concept.  What does it mean when we say that the securities markets are self-regulated when we have a system of for-profit exchanges that have engaged a single organization (which is itself closely regulated by the government) to conduct the exchanges’ self-regulation?

See: FINRA Press Release.

The SEC published for public comment its Draft Strategic Plan, which outlines the agency’s mission, vision, values, major initiatives, performance metrics and strategic goals for fiscal years 2014 to 2018. 

The draft of the plan establishes four primary strategic goals (though these are at a high level of generality), which are as follows:

• to establish and maintain an effective regulatory environment;
• to foster and enforce compliance with federal securities laws;
• to facilitate access to the information that investors need to make informed investment decisions; and
• to enhance the SEC’s performance through the effective alignment and management of human, information and financial capital.

Of more interest to practitioners are the specific goals, which include:

• improving disclosure
• JOBS Act and Dodd-Frank rulemaking
• strengthening proxy infrastructure
• increased disclosure as to beneficial ownership relating to derivative positions
• regulation of broker-dealers providing personalized advice
• disclosure and other requirements as to mutual funds
• regulation of accountants and of the conduct of audits
• regulation of clearing structures
• disclosures as to asset-backed securities
• regulation of municipal advisors
• regulation of market structure, including as to algorithmic and automated trading, and to the regulation of ATS and dark pools
• regulation of the options markets
• improving the technological infrastructure of the markets
• regulation of small cap securities
• regulation of money market funds
• the market structure for fixed income debt

Comments on the Draft Strategic Plan should be sent by email to performanceplanning@sec.gov by March 10, 2014.

Lofchie Comment:  This long laundry list of tasks in the SEC’s strategic plan emphasizes the significance of Commissioner O’Malia’s observation that Congress is not serving investors or the economy when it imposes on the SEC the requirement to adopt rules that have nothing whatsoever to do with the actual mission of the SEC, but that are intended to advance an interest group’s political or electoral agenda.  See, e.g., SEC Commissioner Gallagher Remarks on Corporate Disclosure.  That said, the most interesting question raised by Commissioner O’Malia was this: Given that the SEC has more tasks than it has hands to achieve those tasks, how should the SEC prioritize the fulfillment of Congressional directives that have nothing to do with the protection of investors?

See:  SEC Draft Strategic Plan 2014-2018. 

The Financial Crimes Enforcement Network (“FinCEN”) published two administrative rulings, providing additional information on whether a person’s conduct related to convertible virtual currency brings them within the Bank Secrecy Act’s (“BSA”) definition of a money transmitter. The first ruling concludes the following:

• to the extent a user creates or “mines” a convertible virtual currency solely for a user’s own purposes, the user is not a money transmitter under the BSA.

The second states:

• a company purchasing and selling convertible virtual currency as an investment exclusively for the company’s benefit is not a money transmitter.

The rulings further interpret FinCEN’s March 18, 2013 Guidance to address these business models.

Lofchie Comment:  The use of the term “mining” in relation to Bitcoins is both funny (the notion of digging virtual coins of the ground) and sad (the history of actual mining work is pretty bleak).  Here is a link to the photographic archive of Lewis Hines, who took pictures of miners and their families in the early part of the twentieth century.

See:  FinCEN Press Release.