CFTC to delay decision on swap dealer registration change
Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo announced his intention to delay lowering the threshold for swap dealer registration from $8 billion for another year until December 2019, according to testimony on Wednesday before the House Agriculture Committee. The threshold was set to fall to $3 billion in December 2018. The announcement came shortly after the Treasury Department released its report on capital markets in which it recommended retaining the threshold at $8 billion.
This delay follows the issuance of a CFTC staff report on the de minimis threshold in August 2016 that identified three issues for the CFTC to consider: (1) retaining, lowering, or delaying changes to the $8 billion threshold, (2) excluding on-facility swaps from the calculation, and (3) adjusting the exclusion for small banks.
Lowering the swap dealer registration threshold to $3 billion is all but formally off the table. Between Giancarlo’s statements, the Treasury Report’s concurrence, and enough Administration appointees at the CFTC to support less regulation, the delay merely buys time to get a new regulation done, which we expect to keep the level at $8 billion. In the meantime, this “hold the line” delay gives dealing firms below the $8 billion threshold two more years to trade based on business imperatives instead of regulatory constraints.
SEC to simplify disclosure requirements
The Securities and Exchange Commission (SEC) proposed amendments on Wednesday to modernize and simplify Regulation S-K, a longstanding SEC regulation containing disclosure requirements for public companies, investment advisers, and investment companies. This proposal builds off of efforts, including a study and a concept release, issued in 2015.
The proposal contains a series of technical changes that would eliminate duplicative or outdated requirements and simplify numerous disclosure requirements for reporting and other SEC filings, mostly in the business and financial disclosure sections. Although it does not revise disclosures required in connection with securities offerings (prospectuses and registration statements) or executive compensation, it does include new ideas such as requiring the disclosure of Legal Entity Identifiers (LEIs) and extending the reforms to foreign private issuers.
This proposal came out only one week after Treasury called for reducing and streamlining disclosure requirements in its capital markets report and is in line with SEC Chair Jay Clayton’s commitment to these issues outlined in several speeches and testimonies. Granted, this tweak and propose effort was easy as it had been preceded by years of study and a concept release, but it was still a bold turn by the SEC toward updating its disclosure regime. Starting with Regulation S-K, which hasn’t materially changed in 30 years, is as good a place as any. Momentum and change will build over the next year as the SEC ticks off other widely forecasted changes in the Treasury Report to increase the attractiveness of the US equities markets in an era of ample private equity funding and innovative disintermediation.
House Financial Services approves a flurry of FS bills
The House Financial Services Committee approved 22 bills that would each reform different aspects of current financial services laws. Two of these bills passed on a party line vote: repeal of the Department of Labor’s fiduciary rule and an exemption for “micro-offerings” from securities registration. The rest attracted bipartisan support. The bills proposed range from lessening securities law disclosures to protecting the elderly against financial exploitation. Three in particular are of note.
First, the Committee - which consists of 34 Republicans and 26 Democrats - voted 47-12 to advance a bill that would replace the current $50 billion threshold for becoming a systemically important financial institution (SIFI) subject to enhanced regulatory oversight with two triggers. One would treat global systemically important bank holding companies (GSIBs) as SIFIs, with input from the Financial Stability Oversight Council (FSOC). The other would permit the Fed to designate non-GSIBs as SIFIs either as a one -off or by regulation, with FSOC review, taking into account factors such as the institution’s size, interconnectedness, and complexity.
Keeping in line with reducing the regulatory burden on smaller firms, another bill would raise the threshold for a bank to send required reports to the Consumer Financial Protection Bureau from $10 billion to $50 billion was approved 39-21.
A third bill would halt reporting to the Consolidated Audit Trail (CAT) until comprehensive internal risk control mechanisms are developed in consultation with the SEC’s Chief Economist was approved 59-1. Because of recent data breaches both at the SEC and Equifax, Congress has received a groundswell of pressure to revisit the CAT’s contents - which include consumer data such as social security numbers - as well as its November 2018 start date for reporting.
Passing individual financial reform bills seems to be the best chance Congress has to get anything done. Not all will go through, but expect the bills we highlighted to gain support in the Senate. Notably, the replacement of the SIFI threshold with new standards and limits could reflect the bipartisan Senate plan being worked on by Senators Mike Crapo (R-ID) and Sherrod Brown (D-OH), but it remains to be seen what final agreement will look like. Separately, the march toward more consumer protection took an unusual turn in this bill set, with a bill targeting delay in the build of CAT simply because it include consumer information.
Treasury issues report on tax reform
Last week, the Treasury Department released its second report on “Identifying and Reducing Tax Regulatory Burdens” in response to an Executive Order calling for the reduction of tax regulations that “impose an undue financial burden” or “add undue complexity.” The report recommends that several tax regulations should be revoked or substantially revised, including regulations on the treatment of interests in corporations, gains or losses with respect to a Qualified Business Unit, property transfers to foreign corporations, and partnership liabilities.
In addition, the report states that Treasury will continue to review and consider reforms for regulations not included in the report, including those around dividend equivalent payments and the Foreign Account Tax Compliance Act.
While the report recommends specific actions to eliminate or mitigate “burdensome” regulations, Treasury still must act to issue the guidance implementing its proposed policy changes. The report also highlights the fact that tax reform legislation currently under consideration by Congress will have a significant impact on many of the areas in which it made recommendations, including the treatment of interests in corporations. As a result, it will adopt a wait and see approach in some areas - stay tuned for how tax reform legislation will affect tax regulation.
On our radar
Below is a list of new developments on our radar this week. We’ll share Our Take on these items in the future as warranted. In the meantime, please contact us with other hot topics:
● Randal Quarles sworn in as Fed Chairman of Supervision. Today, Randal Quarles was sworn in to become the first Fed chairman of supervision, a role that had previously been unofficially filled by former Fed Governor Daniel Tarullo. The other vice chair spot will be open on Monday, Governor Stanley Fischer’s last day at the Fed. That opening brings three open slots at the Fed available for the Administration to fill, not including the Fed Chair position which will become vacant early next year.