Author Archives: Steven Lofchie

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.

UK and EU Securities Regulators Agree to Cooperate in Event of No-Deal Brexit

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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.

FDIC Chair Jelena McWilliams Highlights Policies to Serve Underbanked Customers

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FDIC Chair Jelena McWilliams highlighted agency priorities to ensure that banks offer “affordable, responsible financial products and services to consumers across the spectrum.”

In remarks at the Florida Bankers Association Leadership Dinner, Ms. McWilliams stated that the agency’s priorities include:

  • encouraging de novo bank formation; she said that de novo banks are a “key source of new capital, talent, ideas, and ways to serve customers”;
  • tailoring FDIC’s regulations to permit banks to serve customers more efficiently while also making sure banks stay “safe and sound”;
  • taking a “holistic” look at the FDIC’s supervision of banks;
  • ensuring that banks “leverag[e] technology” to reach unbanked and underbanked consumers;
  • “protecting the Deposit Insurance Fund and maintaining financial stability [while] allowing banks room to be nimble and make the right business decisions to better serve their customers and communities”; and
  • ensuring that the FDIC and the banking industry respond to changes in consumer behavior.

Lofchie Comment: FDIC Chair McWilliams’ comments focused to a significant degree on assisting banks in providing services to the poor and overextended, those who live “paycheck to paycheck” and who sometimes “need immediate access to cash to cover an unexpected cost before the next paycheck.” The business of lending money to those who urgently need small amounts for short periods was disparagingly referred to as “payday lending.” Under the CFPB’s prior administration the CFPB adopted rules that would have significantly discouraged such lending. See, e.g., CFPB Imposes Stricter Rules for Payday Lending. While it is all well and good to regulate practices that protect disadvantaged consumers, it is not so great if the protection leaves these consumers worse off by depriving them entirely of access to credit. Ms. McWilliams comments suggest that she will be more attuned to the costs as well as the benefits of regulation.

NYDFS Superintendent Reminds Firms of Final Implementation Date for Cybersecurity Regulation

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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.

CFTC Chair Giancarlo Seeks to Extend SEF Comment Period, Move Forward on Cross-Border Framework

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CFTC Chair J. Christopher Giancarlo will seek an extension (to March 15) of the comment period for a proposal to amend various aspects of the rules governing the trading of swaps (the “SEF Proposal”). He also intends to move forward with amendments to the CFTC cross-border framework.

In a keynote address at the ABA Business Law Section Derivative & Futures Law Committee Meeting, Mr. Giancarlo highlighted aspects of the SEF Proposal and his approach to cross-border regulation.

On cross-border matters, Mr. Giancarlo reiterated points he raised in a 2018 white paper, “Cross-Border Swaps Regulation Version 2.0.” He recommended changes to the rules to avoid the fragmentation of liquidity across borders, which, he argued, results in smaller liquidity pools with less efficient and more volatile pricing. Mr. Giancarlo said he remains open to refinements of his approach, particularly as it relates to “arranged, negotiated or executed” transactions. Mr. Giancarlo said he would direct the CFTC staff to prepare “as soon as possible . . . various new cross-border rule proposals.” He said these proposals will address a range of issues, including the registration and regulation of swap dealers, swaps central counterparties and swaps-trading venues.

On the SEF Proposal, Mr. Giancarlo said that recent deliberations with market participants showed widespread agreement that “the current framework is flawed, clunky and would benefit from substantial revision.” He noted general support for (i) replacing existing guidance and no-action letters with final rules, (ii) more flexible methods of execution, (iii) easing the burdens of swap execution facility (“SEF”) compliance and (iv) broker proficiency exams.

Mr. Giancarlo said that market participants expressed their concerns with (i) the process and timing of any new rules, (ii) proposed restrictions on pre-trade communications and (iii) “overly simplified” changes to the standard for “impartial access.”

He welcomed comments on, among other things:

  • certain minimum conditions with adequate timing for connectivity and onboarding that could be imposed before swaps became subject to mandatory trading;
  • the pre-trade communications rule, which, he said, was not intended to “disintermediate essential client relationships;”
  • whether encouraging liquidity and price formation on SEFs is sufficiently furthered without a need to ban pre-trade communications off SEFs; and
  • whether the imposition of minimum membership standards (to the extent consistent with an SEF statutory right to establish such criteria) would improve the proposed standards.

In light of the interest in the proposal, Mr. Giancarlo will seek to extend the comment period to March 15. (The comment deadline for the SEF proposal is currently February 13, 2019.)

OFAC Designates Venezuelan Oil Sector Company for Sanctions

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The U.S. Treasury (“Treasury”) Department Office of Foreign Assets Control (“OFAC”) sanctioned Petróleos de Venezuela, S.A. (“PdVSA”), the Venezuelan state-owned oil and natural gas company, pursuant to Executive Order (“EO”) 13850.

The move comes less than a week after the United States recognized opposition politician Juan Guaidó as the interim leader of Venezuela. In general – and except as provided in the General Licenses described below – as of January 28, 2019, the property and interests in property of PdVSA and its majority-owned subsidiaries are blocked, and U.S. persons are prohibited from having dealings with them.

The action to designate PdVSA followed a determination made by Treasury Secretary Steven Mnuchin, in consultation with Secretary of State Michael Pompeo, that persons who operate in the oil sector of the Venezuelan economy may be subject to sanctions. While the addition of PdVSA to OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”) imposes broad prohibitions on dealings with the Venezuelan state-owned oil company, OFAC simultaneously issued seven General Licenses that authorize certain transactions with PdVSA and its subsidiaries, including U.S.-based refiner and retailer CITGO Holding, Inc. (“CITGO”) and its corporate parent, PDV Holding, Inc. (“PDVH”).

Most importantly, General License 7 and General License 12 permit the continued importation into the United States of Venezuelan oil through April 28, 2019, provided that any payments to PdVSA or its majority-owned subsidiaries – other than CITGO and PDVH – be made into a blocked, interest-bearing account located in the United States. Because the U.S. government previously prohibited CITGO from transferring profits to PdVSA, the cumulative effect of the January 28 sanctions is to prevent Venezuelan oil profits earned in the United States from flowing back to PdVSA and, by extension, the regime of Nicolás Maduro.

Separately, President Donald J. Trump signed a new Executive Order expanding the definition of “Government of Venezuela” specifically to include PdVSA, as well as “persons that have acted, or have purported to act, on behalf of the Government of Venezuela, including members of the Maduro regime.”

SEC Recommences Normal Operations

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SEC Chair Jay Clayton announced that the agency is back to normal staffing and operations. Mr. Clayton stated that the Divisions of Corporation Finance, Trading and Markets, Investment Management and the Office of Compliance Inspections and Examinations, “will be publishing statements in the coming days regarding their transition plans.”

Ranking Member of the House Financial Services Committee Offers Republican List of Hearing Priorities

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Ranking Member of the House Financial Services Committee (“HFSC”) Patrick McHenry (R-NC) offered to cooperate with new Chair Maxine Waters on a list of priorities affecting the U.S. financial system.

According to Mr. McHenry, the list of hearing topics concern areas that are critical to ensuring the “strength and stability of the U.S. financial system and the global competitiveness of American job creators.” The list includes:

  • Britain’s withdrawal from the European Union and its effects on the U.S. economy and the international financial system;
  • the Export-Import Bank and “its impact on the global competitiveness of U.S. companies and U.S. job creation”;
  • cybersecurity within the financial space, to evaluate the “readiness” of the financial sector and the ability of the U.S. government to protect digital consumer accounts against fraud, misuse and improper access;
  • China’s “debt trap” and the implications of China’s lending decisions in relation to the IMF, the World Bank and global systemic risk;
  • foreign investment and venture capital in the global economy, to assess how the U.S. Treasury Department is implementing the Foreign Investment Risk Review Modernization Act of 2018;
  • scheduled reductions to the Federal Reserve’s balance sheet, specifically in relation to unwinding crisis-era asset purchases;
  • the National Flood Insurance Program (“NFIP”), to examine proposed reforms that could impact the “affordability, availability and long-term solvency of the NFIP”;
  • the modernization of the Bank Secrecy Act and Anti-Money Laundering regulatory regime to inspect the duplicative nature of the current rules;
  • the Terrorism Risk Insurance Act, to provide oversight of the program, better comprehend the private insurance market, and build consensus before the program expires;
  • the regulation of FinTech; and
  • the oversight of the Financial Accounting Standards Board and its Current Expected Credit Loss Accounting Standard.

Mr. McHenry noted that the list is not exclusive, but that it gives the HFSC an opportunity to better understand the “complex legislative landscape we will face this Congress.”

Lofchie Comment: The list contains a number of important big-picture concerns. It is not a list, however, likely to generate much political or press excitement. In this environment, it is an open question whether Chair Waters will take up any of the items on Representative McHenry’s list.

Senate Banking Committee Names New Subcommittee Members

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The U.S. Senate Committee on Banking, Housing, and Urban Affairs Chair Mike Crapo (R-IA) and Ranking Member Sherrod Brown (D-OH) named new members to the banking subcommittees for the 116th Congress.

The banking subcommittees include (i) Housing, Transportation, and Community Development (David Perdue, GA, Chair, Robert Menendez, NJ, Ranking Democrat); (ii) Financial Institutions and Consumer Protection (Tim Scott, SC, Chair; Elizabeth Warren, MA, Ranking Democrat); (iii) Securities, Insurance, and Investment (Patrick J. Toomey, PA, Chair; Chris Van Hollen, MD, Ranking Democrat); (iv) National Security and International Trade and Finance (Ben Sasse, NE, Chair; Mark Warner, VA, Ranking Democrat); and (v) Economic Policy (Tom Cotton, AR, Chair; Catherine Cortez Masto, NV, Ranking Democrat).

Mr. Crapo and Mr. Brown will serve on all subcommittees as non-voting members.

Democratic Steering and Policy Committee Names New Members to Financial Services Committee

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The House Democratic Steering and Policy Committee named new members to the House Financial Services Committee in the 116th Congress. The newly chosen members are:

  • Representative Alma Adams (D-NC);
  • Representative Cindy Axne (D-IA);
  • Representative Sean Casten (D-IL);
  • Representative Madeline Dean (D-PA);
  • Representative Tulsi Gabbard (D-HI);
  • Representative Jesus Garcia (D-IL);
  • Representative Sylvia Garcia (D-TX);
  • Representative Al Lawson (D-FL);
  • Representative Ben McAdams (D-UT);
  • Representative Alexandria Ocasio-Cortez (D-NY);
  • Representative Dean Phillips (D-MN);
  • Representative Katie Porter (D-CA);
  • Representative Ayanna Pressley (D-MA):
  • Representative Michael San Nicolas (D-GU);
  • Representative Rashida Tlaib (D-MI); and
  • Representative Jennifer Wexton (D-VA).

New House Financial Services Committee Chair Maxine Waters Outlines Priorities

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New Chair of the House Financial Services Committee (“FSC”) Maxine Waters (D-CA) outlined Committee priorities.

In remarks delivered before the Center for American Progress, Chair Waters outlined the following FSC priorities: the Consumer Financial Protection Bureau (“CFPB”), Housing, Diversity and Inclusion, International Affairs (particularly governance at the International Monetary Fund and World Bank) and Russia sanctions. She also stated that she plans to address, on a bipartisan basis, long-term reauthorization and reform of the National Flood Insurance Program (NFIP), Terrorism Risk Insurance (TRIA), and the reauthorization of the Export-Import Bank.

Chair Waters stated that her ongoing priority is to ensure a strong CFPB and robust financial regulation that protects consumers, investors and the economy. She criticized Congressional Republicans and the Trump administration for weakening the CFPB, citing former Acting Director of the CFPB Mick Mulvaney’s decision to fire all members of the Consumer Advisory Board. Ms. Waters stated that she will introduce a bill that “reverses many of [Mick Mulvaney’s] harmful actions.”

Ms. Waters also stated that she will focus the FSC on issues related to FinTech. In particular, she said, it is critical that the FSC work to foster “responsible innovation with the appropriate safeguards in place to protect consumers and without displacing community banks and credit unions.”

In addition, Ms. Waters expressed concerns over the impact of the government shutdown on programs under the jurisdiction of the FSC. In particular, she noted the impact of the shutdown on SEC enforcement, and potential delays to initial public offerings. She also described the impact of the shutdown to key programs under FHA and HUD.