Sunday, March 31, 2013

FSOC's Role Questioned Amid Diverging Regulations Implementing Dodd-Frank


The role of the Financial Stability Oversight Council in assuring the coordination and harmonization of federal regulations implementing the Dodd-Frank Act has been raised by legislators and others as it becomes apparent that FSOC has no statutory power to ensure either the simultaneous adoption of the regulations implementing the Volcker Rule provisions of Dodd-Frank or their uniformity. At a recent House hearing, former Financial Services Committee Chairman Spencer Bachus (R-AL), currently Chairman Emeritus of the Committee, examined the failure of FSOC to coordinate regulatory uniformity among its constituent members, such as the SEC and CFTC. The Chairman Emeritus asked Treasury to respond in a memorandum to  the Committee outlining the legislative authority it needs to achieve such a result. 

Last December, Senate Banking Committee member Mark Warner (D-VA) told the Bipartisan PolicyCenter that the 113th Congress should consider major Dodd-Frank Act corrections legislation.  One area of Senator Warner's concern is that the Financial Stability Oversight Council is an imperfect creation with no independent entity or person in charge. Senator Warner noted that FSOC has not become the arbiter of conflicting regulations that he envisioned it would be. It has not played the role of adjudicator of conflicting regulations. 

Recently, former Fed Chair Paul Volcker emphasized that the final Volcker Rule regulations should be uniform for all covered financial institutions. However, the relevant regulating agencies have overlapping responsibilities, idiosyncratic ideas of their own, and differing approaches. The FSOC, he said, while a step in right direction, needs a much stronger mandate from Congress to be effective.

FSOC is housed in the Treasury and the Secretary of Treasury is FSOC's permanent chair. This gives Treasury a bully pulpit from which to jawbone its constituent members on the need for regulatory harmony. But perhaps bully pulpits are overrated and jawboning historically powerful independent federal executive agencies can only go so far. FSOC may need statutory authority in any Dodd-Frank corrections legislation. 


Friday, March 29, 2013

House Oversight Chairs Ask SEC for Accounting of Commission Resources Expended on Gabelli Case


In a letter to SEC Chair Elisse Walter, House Financial Services Committee Chair Jeb Hensarling (R-TX) and Capital Markets Subcommittee Chair Scott Garrett (R-NJ) expressed their concern that the SEC continues to commit its limited resources to the pursuit of dubious legal theories at the same time that it struggles to meet statutorily imposed deadlines for promulgating regulations mandated by Congress. The oversight chairs are particularly alarmed by the juxtaposition of the SEC’s recent request for an additional $350 million in funding for fiscal year 2014 and the U.S. Supreme Court’s recent unanimous opinion in Gabelli v. SEC  rejecting the SEC’s position of the application of a discovery rule to a federal statute of limitations.

With that in mind, Chairmen Hensarling and Garrett asked the SEC to provide, by April 5, 2013, the total number of staff hours dedicated to the Gabelli case, including but not limited to the total number of SEC staff labor hours spent litigating and appealing the case and the exact dollar figure associated with that labor. Also, if applicable, the SEC is asked to provide an accounting of any funds paid to outside counsel related to the Gabelli efforts.

On February 27, 2013, the Supreme Court ruled that the SEC must seek civil penalties within five years of an alleged violation of the Investment Advisers Act not, as the SEC had urged, five years from the date on which the SEC discovered or could have discovered the violation. In so ruling, the Court rejected application of the discovery rule approach to extending the statute of limitations in enforcement actions brought by the SEC. In the enforcement action, the SEC had alleged market timing violations of the Advisers Act and sought monetary penalties for those violations. The Advisers Act, like many federal statutes, does not set forth a specific time period within which the government must institute an enforcement action. In such instances, the five-year limitations period in 28 USC 2462 is applied. Gabelli v. SEC, Dkt. No. 11-1274.

In his opinion, noted the House leaders, Chief Justice Roberts drew a distinction between private parties who may be unwitting victims of fraud and government agencies whose core mission is to identify and pursue wrongdoing. Unlike the private party who has no reason to suspect fraud, said the Court, the SEC’s very purpose it to root it out and it has many legal tools at hand to aid it in that pursuit.

The House leaders observed that the Court’s opinion outlined the numerous legal tools available to the SEC to investigate securities fraud, including access to books and records, subpoena power, and authority to compensate whistleblowers. Given these significant investigative powers, the House oversight chairs agreed with the Supreme Court’s observation that, armed with these weapons, the SEC as an enforcer is a far cry from the defrauded victim the discovery rule evolved to protect. Chairmen Hensarling and Garrett expressed surprise that the SEC was unable to discover potential wrongdoing and institute civil proceedings against the Gabelli funds within a five-year time period. The Chairs again emphasized that the SEC should use its limited resources more productively, mentioning in this context meeting the statutory deadlines imposed by the JOBS Act, rather than pursuing baseless claims through several layers of appeal.

European Commission Extends Investigation of Anti-Competitiveness in Credit Default Swap Market to ISDA


The European Commission has extended the scope of an investigation into the market for credit default swaps to include the International Swaps and Derivatives Association (ISDA), a professional organization of financial institutions involved in the OTC trading of derivatives. The Commission's inquiry found preliminary indications that ISDA may have been involved in a coordinated effort of investment banks to delay or prevent exchanges from entering the credit derivatives business. Such behavior, if established, would stifle competition in the internal market in breach of EU antitrust rules.

This investigation was opened in April 2011 and is currently on-going. The Commission is examining whether a number of investment banks may have used a leading provider of financial information in the credit default swap market to foreclose the development of certain trading platforms. This could have been achieved through collusion or an abuse of a possible collective dominance.

Articles 101 and 102 of the Treaty on the Functioning of the European Union prohibit anticompetitive agreements and the abuse of dominant positions. The implementation of these provisions is defined in the EU's Antitrust Regulation, which can also be applied by national competition authorities. There is no legal deadline to complete antitrust investigations.  Rather, the duration of an antitrust investigation depends on a number of factors, including the complexity of the case and the extent to which the undertaking concerned cooperates with the Commission.
Credit default swaps are financial products traded between financial institutions or investors. They are derivatives originally created to provide protection against the risk of default. Information about credit default swaps is needed to allow market participants to determine the value of their investment portfolios and develop investment strategies. In order to create and sell aggregated credit default swap information products and services, information service providers need access to a certain amount of  transaction and valuation data.
The Commission has actually opened two antitrust investigations concerning the credit default swaps market. In the first case, the Commission is examining whether sixteen investment banks and a leading provider of financial information in the credit default swap market colluded and may hold and abuse a dominant position in order to control the financial information on credit default swaps. The first investigation focuses on the financial information necessary for trading credit default swaps. The Commission has indications that the sixteen investment banks that act as dealers in the credit default swap market give most of the pricing, indices and other essential daily data only to the leading provider of financial information in the market concerned. This could be the consequence of collusion between them or an abuse of a possible collective dominance, reasoned the Commission, and may have the effect of foreclosing the access to the valuable raw data by other information service providers.
In the second case, the Commission opened proceedings against nine of the sixteen investment banks and ICE Clear Europe, the leading clearing house for credit default swaps. Here, the Commission is investigating in particular whether the preferential tariffs granted by ICE to the investment banks have effectively locked them into the ICE system to the detriment of competitors. More specifically, the Commission is investigating a number of agreements between the nine credit default swap dealers. These agreements contain a number of clauses involving preferential fees and profit sharing arrangements that might create an incentive for the investment banks to use only ICE as a clearing house. The effects of these agreements could be that other clearing houses have difficulties successfully entering the market and that other players in the credit default swap market have  no real choice where to clear their transactions. If proven, the practice would violate Article 101.
The Commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine investment banks by discriminating against other credit default swap dealers. This could potentially constitute an abuse of a dominant position by ICE in breach of Article 102.



Hedge Fund Industry Comments on Proposed Investment Income Tax Rules


In a letter to the Internal Revenue Service, the hedge fund industry asked that proposed regulation 130507-11 on net investment income be implemented  in a manner that avoids unintended consequences, such as limiting the ability of taxpayers to net against relevant income applicable expenses, losses, and deductions. The industry cautioned that limiting the ability of taxpayers to include these appropriate items when they calculate their net investment income will lead to taxpayers incurring tax liability on investment income beyond the taxpayer’s real net gains or losses on relevant categories of income.

Thus, and more specifically, the Managed Fund Association urged the IRS to amend the proposed regulation to better ensure that gains and losses derived from the trade or business of trading in securities or commodities can be netted against each other and ensure that capital gains and losses can be fully netted against each other. The proposed regulation should also permit net operating loss carryforwards with respect to eligible items, subject to appropriate tracking, permit taxpayers to deduct foreign taxes in calculating their net investment income and permit up to $3,000 in capital losses to be deducted from gross income from interest, dividends, annuities, royalties, and rents.

Moreover, the proposed regulation should permit the election with respect to the treatment of controlled foreign corporations and passive foreign investment corporations that are qualified electing funds to be made at the partnership level, or allow the election to be made on individual corporate level.

The proposed regulation currently requires that a taxpayer make an irrevocable election to treat earnings from foreign companies as current net investment income for purposes of the tax. This requirement presents a significant problem for investment funds as the election would be made at the individual investor level. As such, an investment fund would have to maintain two sets of records with respect to all of its investments in foreign corporations unless the investment fund can confirm that all of its direct and indirect investors have made the necessary election. In order to make the election more feasible for investment funds and other partnerships, the MFA urged the IRS to allow the election regarding the net investment income tax treatment of controlled foreign corporations and passive foreign investment corporations to be made at the partnership level on behalf of underlying investors.

Alternatively, the IRS was encouraged to permit taxpayers to make the election on an entity-by-entity basis. The MFA reasoned that this alternative approach would make it more likely that an investment fund or other partnership could require all of its investors to make the election as the election would only pertain to the investor’s indirect investments in controlled foreign corporations and passive foreign investment corporations through its investment in the fund.

Thursday, March 28, 2013

In Letter to SEC, House Oversight Leaders Urge Full Implementation of Dodd-Frank Provision Mandating Removal of References to Rating Agencies


In a letter to SEC Chair Elisse Walter, House Financial Services Committee Chair Jeb Hensarling (R-TX) and Capital Markets Subcommittee Chair Scott Garrett (R-NJ) emphasized that the repriortization of SEC Dodd-Frank Act rulemaking to crafting regulations under Section 939F rather than completing the work under Section 939A would further entrench the status quo of the Big Three credit rating agencies rather than reforming their structures. Section 939A requires federal agencies to remove from their regulations any reference to, or requirement of, reliance on credit ratings. The House oversight leaders asked Chairman Walter to respond by April 5, 2013 and detail the Commission’s progress in finalizing the Section 939A mandate and tell the Committee when Congress can expect to see this provision fully implemented. Congress expects the SEC to refocus its efforts and complete its regulations implementing Section 939A before taking any actions to implement Section 939F.

More broadly, the House leaders noted that the global financial crisis exposed serious deficiencies in the performance of Nationally Recognized Statistical Rating Organizations (NRSROs), commonly known as credit rating agencies. As the crisis unfolded, investors become increasingly, and sometimes solely, reliant on the use of credit ratings to determine the safety and soundness of their investments. Congress enacted Section 939A to address these deficiencies by ending the federal government’s apparent endorsement of the ratings issued by credit rating agencies and investor over-reliance on such ratings by requiring every federal agency to review any of their regulations that use credit ratings to assess creditworthiness. At the conclusion of this review, each agency must report to Congress on how the agency modified these references and replaced them with alternative standards of appropriate creditworthiness.

Chairmen Hensarling and Garrett noted that, although the SEC has not yet fully complied with Section 939A, the Commission nevertheless announced that it would convene a Credit Ratings Roundtable on May 14, 2013 to examine the SEC staff report of December, 2012, issued pursuant to Section 939F, relating to the feasibility of a system under which a public or private utility would assign an NRSRO to determine credit ratings for structured finance products. Rather than convening this Credit Rating Roundtable, the House Chairs urged the SEC to heed recent remarks by Commissioner Daniel Gallagher expressing frustration with the SEC’s inability to fully implement the Section 939A mandate to remove all references to SEC-registered credit rating agencies, formally referred to as nationally recognized statistical rating organizations, from all agency regulations. (see remarks by SEC Commissioner Daniel Gallagher, Jan. 16, 2013, before the U.S. Chamber Center for Capital Markets Competitiveness, Washington, D.C.)


In contrast to the goal of Section 939A to reduce investor reliance on credit ratings, encourage investor due diligence and increase competition among rating agencies, observed the FSC leaders, Section 939F(d)(1) has the potential to create a new financial crisis by cementing the dominant market position enjoyed by Standard & Poors, Moody’s Investor Service and Fitch Ratings and further entrenching the federal government in the ratings process. The oversight chairs reasoned that only by removing what they called the ``Good Housekeeping seal of approval’’ bestowed by the government can competition among rating agencies be increased and investor reliance on credit ratings be lessened. In turn, this will reduce the likelihood of a future financial crisis based on fundamentally flawed credit risk analysis.


E.U. Parliament and Council Approve Venture Capital Regulation


The European Parliament and Council have given final approval to the Venture Capital Regulation, creating an effective EU-wide venture capital fund regime including an EU passport. The overall objective is to foster the growth of small and medium-sized enterprises by improving their access to finance through the establishment of an EU-wide passport for managers of venture capital funds and relating to the marketing of their funds. The Regulation will enter into force 20 days after its publication in the Official Journal of the European Union, which is expected to be sometime in the next few months.

The Regulation introduces uniform requirements for the managers of collective investment undertakings that want to operate under the E.U.-wide passport. There are requirements concerning the investment portfolio, investment techniques and eligible undertakings that a qualifying fund may target. The Regulation also sets forth uniform rules on which categories of investors in a European fund may target and on the internal organization deployed by managers that market such funds. Internal Market Commissioner Michel Barnier envisions that identical rules across the E.U. will help create a level playing field for all market participants.

Monday, March 25, 2013

IASB Member Examines Fair Value Accounting of Financial Instruments Under IFRS


In a recent memorandum, IASB Member Phillipe Anjou noted that, while IFRS generally require fair value accounting of financial instruments, IFRS do not require, nor does the IASB plan that they will require, that all assets and liabilities be stated at fair value. The IASB has clearly confirmed a preference for a mixed system of measurements at fair value and measurements at depreciated historical cost, based on the business model of the entity and on the probability of realizing the asset and liability-related cash flows through operations or transfers. A mixed model has been in use since 1989 under IAS 39, noted the Member, it will be maintained under the new IFRS 9.

Fair value is defined as the price which would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants, at the measurement date. It is thus an exit price. The valuation technique to be used depends on each context, and three approaches are possible: income-based, market-based, or cost-based. For financial instruments, noted the IASB Member, fair value is thus a market price, either observed when trading activity is available, or estimated from economic data. IFRS 13 does not prescribe the models used for this purpose. When the market transaction volume decreases so significantly that the observed value no longer reflects the price which would result from a transaction concluded under normal terms and conditions, a more detailed review of this transaction is required, and the price may need to be adjusted.

IFRS 13 describes the fair value concept and how to implement it. Fair value is not always identical to market value, said Member Anjou, even though priority must always be given to observable data when using a mathematical model to estimate fair value. The fair value is stated either directly in the financial statements, and affects the performance
measurement and the accounting net position, or in the notes, to improve the disclosure of risks and of value that may be realizable.

According to the IASB Member, structured or complex financial assets generating cash flows which do not depend only on capital and on contractual interest representing the time value of money and credit risk should definitely be recorded at fair value in the income statement. Embedding in these assets some derivative instruments or leverage clauses substantially alters future cash flows, he said, and historical cost would not reflect the resulting risks. The same applies to assets held in trading portfolios since these are held only with a view to being sold in a relatively short term.

Since derivative financial instruments, such as swaps and options, do not have a cost when signed, their historical cost is not relevant and obviously useless to measure the extent of the commitments undertaken. A market value measurement with matching changes in the income statement is therefore needed to reflect the risks. This certainly generates some volatility, acknowledged the IASB Member, but IFRS 9 contains hedge
accounting provisions which neutralize this volatility when the use of derivative instruments is part of a hedging strategy, provided its effectiveness can be demonstrated.


Big Four Support IASB Establishment of Accounting Standards Advisory Forum


The Big Four support the IASB establishment of the Accounting Standards Advisory Forum to help increase dialogue with the national standard setters, but seek a number of clarifications around the organizational and operational aspects of the proposed Forum. For example, in its letter, Ernst & Young expressed concerns about the frequency of membership review.

The IASB said that membership on the Forum will be reviewed every two years. Although agreeing that there should be a review of the membership, E&Y is concerned that this period may be too short to allow members to contribute meaningfully and to develop continuity in membership for the Forum to be effective. The goal should be to refresh the Forum from time to time, but to retain some continuity to gain the maximum benefit from discussion with the standard setters. 

E&Y would also like clarity on the purpose of the ASAF and the role it is meant to play in the standard setting process. The IASB indicates that the purpose is to have detailed technical discussions on current topics, noted the firm, but it is unclear what this would mean in practice. The interaction between the IASB, the Forum and national standard setters that are involved in a specific project should also be clarified. This would also include addressing the process of how a national standard setter is selected to assist in a specific project.

The firm also advised that, in setting the agenda for the ASAF, the IASB must avoid the appearance that there is undue influence on the IASB agenda. The IFRS Foundation should avoid situations in which the papers being discussed by the ASAF mirror too closely to the papers that are discussed by the IASB during deliberations at a subsequent meeting as this could be viewed as pre-determining the IASB discussions.

In its letter, KPMG strongly agreed that the ASAF should be an advisory body only and therefore would not have any decision-making authority. KPMG expects, however, that the views presented in the ASAF to be carefully considered by the IASB, and for the Board to provide progress reports as to how issues discussed with ASAF have been ultimately decided. 

Deloitte & Touche views the Forum as assisting the IASB to accomplish two distinct but related aims: the development of high-quality financial reporting standards; and assist in facilitating the incorporation and endorsement of such standards without modification in the financial reporting framework of individual jurisdictions.  Given this view, Deloitte thinks it important to establish a clear objective for the Forum, one that identifies clearly the two aims and how they relate to the IFRS.

It is desirable to engage a network of national standard-setters, regional groups of standard-setters and bodies involved with standard-setting from those jurisdictions that have incorporated IFRS into their financial reporting framework, and those considering such an action.  The Forum should support the maintenance and better use of technical resources around the world and assist in the development of high-quality financial reporting standards and the promotion of IFRS in a sustainable manner.

In its letter, PricewaterhouseCoopers said that national standards setters have wide-ranging engagement with other stakeholders in the jurisdictions in which they operate, and hence have valuable insights that they can contribute to the IASB. The firm supports bilateral relationships with national standard setters. As more jurisdictions move to adopt IFRS, it will be increasingly important to find a practical and manageable means of harnessing the input that these bodies can provide. At the same time, PwC believes that the IASB and its stakeholders should be realistic about what the proposed Forum can achieve.

Saturday, March 23, 2013

House Panel Approves Legislation on Derivatives End Users Exemption, Inter-Affiliate Swap Exemption, and Mandating Joint SEC-CFTC Regulations on Cross-Border Transactions

The House Agriculture Committee marked up and approved a series of bills amending the Dodd-Frank Act to codify the derivatives end users exemption, create an exemption for inter-affiliate swap transactions, mandate joint SEC-CFTC regulations on cross-border derivatives transactions, limit the swap desk push out provision to complex and risky derivatives involving structured finance, and allow data-sharing between U.S. and non-U.S. regulators. The Committee also approved legislation mandating that the CFTC conduct a robust cost-benefit analysis of proposed regulations. All of the bills were approved with a bi-partisan majority, all but one by voice vote. Committee Chairman Frank Lucas (R-OK) described the legislation as common sense changes to Dodd-Frank and a step in to correct aspects of Dodd-Frank.

The Inter-Affiliate Swap Clarification Act (H.R. 677), approved by voice vote, would ensure that derivatives transactions between affiliates in a single corporate group are not regulated as swaps under the Dodd-Frank Act. The legislation would prevent internal, inter-affiliate swaps from being subject to costly and duplicative regulation.

There is currently no distinction made in Dodd-Frank between external, or market-facing, swaps and internal swaps between two entities within the same corporate organization. The legislation would exempt inter-affiliate swaps from margin, clearing, and execution requirements under Dodd-Frank. In order to ensure a targeted application, there are also important consumer protections in the bill, including a provision ensuring that companies wishing to use this exemption are truly affiliated. The bill would also establish reporting requirements for inter-affiliate swaps. The legislation also contains important anti-evasive provisions authorizing regulators to ensure that this exemption cannot be used to circumvent other regulations within Dodd-Frank. The legislation maintains the authority of state and federal regulators to ensure the safety and soundness of financial institutions. Similar legislation in the 112th Congress, H.R. 2779, passed the House by a vote of 357-36 in March 2012.

The Swap Jurisdiction Certainty Act (H.R. 1256), approved by voice vote, would direct the SEC and CFTC to adopt joint regulations on the regulation of cross-border derivatives transactions. Chairman Lucas noted that H.R. 1256 would also provide that no guidance from the Commissions in this area would have the force of law. Rep. David Scott (D-GA) said that the legislation addresses issues around the extra-territorial application of the Dodd-Frank Act. Non-US persons would not be subject to the Dodd-Frank Act if, as determined by the Commissions, they are subject to an equivalent  derivatives regulatory regime in a G20 country. Rep. C. Michael Conaway (R-TX), Chair of the Commodities and Risk Management Subcommittee, noted that the bill allows the SEC and CFTC to designate other jurisdictions outside of the G20 as equivalent and thus eligible for the exemption.

The Swaps Regulatory Improvement Act (H.R. 992), approved by a vote of 31-14, would modify Section 716 of the Dodd-Frank Act, the bank swaps push-out provision. The legislation would amend Section 716 to ensure that federally insured financial institutions can continue to conduct risk-mitigation efforts for clients like farmers and manufacturers that use swaps to insure against price fluctuations. The bill modifies section 716  to allow commodity and equity derivatives in banks with federal deposit insurance. However, derivatives involving structured finance transactions would still have to be pushed out.
Senate Banking Committee members Senators Kay Hagen (D-NC) and Patrick Toomey (R-PA), along with Agriculture Committee members Senators Mike Johanns (R-NE) and Mark Warner (D-VA) have introduced companion legislation in the Senate.

Currently, under Section 716, federally insured banks would not be permitted to conduct certain swaps trading, including trading of commodity, equity, and credit derivatives, thus compelling the banks to push-out that activity into separately capitalized non-bank affiliates. By prohibiting this activity in federally-insured institutions, regulators would lose some oversight. This legislation will ensure that these swaps take place within institutions that are more closely monitored by federal regulators.

The Swap Data Repository and Clearinghouse Indemnification Act (H.R. 742), approved by voice vote, would ensure that U.S. and foreign regulators can share necessary swaps data to increase market transparency and facilitate global regulatory cooperation. The Dodd-Frank Act requires swap data repositories and clearing organizations to make data available to foreign regulators. But, under Dodd-Frank, this data-sharing can happen only if foreign regulators agree to indemnify the U.S. entity and U.S. regulators for any corresponding litigation expenses that might arise. Foreign regulators have been unwilling or unable to agree to such indemnification agreements under their own legal structures, so the indemnification provisions prevent the necessary data-sharing. To ensure that U.S. and foreign regulators have access to derivatives data, H.R. 742 would eliminate the indemnification provisions that would otherwise impede the necessary data-sharing arrangements.

Last year, the SEC recommended that Congress consider removing the indemnification requirement added by the Dodd-Frank Act. The indemnification requirement interferes with access to essential information, said Ethiopis Tafara, Director of the SEC Office of International Affairs, including information about the cross-border OTC derivatives markets. In removing the indemnification requirement, Congress would assist the SEC, as well as other U.S. regulators, in securing the access it needs to data held in global trade repositories.

The Business Risk Mitigation and Price Stabilization Act (H.R. 634), approved by voice vote, codifies an exemption for non-financial end users that use derivatives in their commercial businesses from the margin requirements of Dodd-Frank. According to Chairman Lucas, H.R. 634 ensures that end users can continue to use derivatives to hedge business risk. He added that Congress never intended for non-financial end-users to be required to post margin under Dodd-Frank. Committee Ranking Member Colin Peterson (D-MN) said that the legislation was needed because the banking regulators ignored the will of Congress and required end-users to post margin. Rep. Michael McIntyre (D-NC) said that  true end users use derivative to protect from losses and ensure stability and not to engage in speculation, adding that  H.R. 634 will not apply to the major financial institutions. This is a critical bill, he emphasized, to ensure that the intent of Congress not ignored.

The Public Power Risk Management Act (H.R. 1038), approved by voice vote, would allow non-financial entities to enter into swap transactions with government-owned utilities without being designated a swap dealer under the Dodd-Frank Act.

Cost-Benefit Analysis

Finally, the Committee approved, by voice vote, legislation H.R, 1003, requiring the CFTC to quantify the costs and benefits of future regulations and orders. The bill would also mandate that the CFTC quantify the impact of market liquidity, a marked change from the current policy of just considering costs. Chairman Conway noted that H.R. 1003 is prospective legislation and thus would not require the CFTC to go back and do a cost-benefit analysis on regulations that the Commission has already adopted.

In addition to market liquidity, H.R. 2003 lists a number of other factors that the CFTC must consider in doing the cost-benefit analysis, including price discovery, efficiency, competitiveness and available alternatives to regulation. The CFTC must also consider if the regulation is inconsistent or duplicative of other federal regulations. The legislation would also update the CFTC’s current requirements to require the examination of the impacts on the previously unregulated swaps markets, a necessary addition because of new authority given to the CFTC under Dodd-Frank. It also would require the CFTC’s chief economist be involved in the cost-benefit analysis, a recommendation made by the commission’s inspector general. Only future proposed rules would be affected; the legislation would not require retroactive analysis of pending proposals.

Tuesday, March 19, 2013

Senator Menendez Urges SEC to Adopt Regulations Implementing Dodd-Frank Pay Ratio Provisions


At the Senate Banking Committee hearings on the nomination of SEC-Chair designate Mary Jo White, Senator Robert Menendez (D-NJ) urged the SEC to expeditiously adopt regulations implementing the CEO pay ration provisions of Section 953(b) of the Dodd-Frank Act. Senator Menendez noted that, while there is no deadline by which the regulations under Section 953(b) must be finalized, some companies are against it claiming it increases compliance costs and is overly burdensome.

Senator Menendez has written two letters to the SEC urging strong and quick implementation of the Section 953(b) regulations. While comprehensive data will not be available until Section 953(b) is implemented, noted Senator Menendez, there is no question that CEO pay is soaring compared to that of average workers. In 2010, large company CEO pay had skyrocketed to 319 times the median worker’s pay, according to the Bureau of Labor Statistics.

A company’s treatment of their average workers is not just a reflection of their corporate values, reasoned the Senator, but is also material information for investors.

Section 953(b) requires disclosure of the median of the annual total compensation of all of the company’s employees, except the CEO, as calculated in accordance with Item 402(c)(2) of Regulation S-K, the annual total compensation of the CEO, and the ratio of the median annual compensation of all employees to the CEO’s compensation. In the 112th Congress, the House Financial Services Committee reported out a bill that would have repealed Section 953(b), but the Burdensome Data Collection Relief Act, H.R. 1062, was never passed by the full House and never taken up by the Senate.
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Increase in High Frequency Trading Not Linked to Increase in Execution Costs


The recent increase in high frequency trading has not resulted in a concomitant change in execution costs for institutional investors, concluded a report released by the UK Financial Services Authority. There was no observable relationship between high frequency trading and institutional execution costs. Since high frequency trading does not have a common definition, the report  defined it based on a couple of criteria. Our primary criterion is based on a definition that high frequency trading is a subset of Algorithmic Trading participants that use proprietary capital to generate returns using computer algorithms and low latency infrastructure.

The report said that it is possible that execution costs continue to decrease over the next decade for a variety of reasons. First, new entries may trigger price wars that end up with further reductions in clearing fees. Second, advances in technology might imply lower transactions costs. These changes in technology might lower barriers to entry.

Moreover, additional market players could appear in the sector, which may offer lower commissions than those that currently exist. Also,  new market players established in countries with lower operating costs could offer the same level of services at a lower price. In addition, new regulations fostering competition could increase competition for volume on a global scale, with a potential reduction of commissions charged by exchanges as more and more participants enter the market and compete for volume.

House Legislation Would Require CFTC to do Cost-Benefit Analysis of Proposed Regulations


Rep. K. Michael Conaway (R-TX) has introduced a bipartisan bill that would require the Commodity Futures Trading Commission to quantify the costs and benefits of future regulations and orders. The bill, H.R. 1003, would also mandate that the CFTC quantify the impact of market liquidity, a marked change from the current policy of just considering costs. H.R. 1003 is co-sponsored by Rep. David Scott (D-GA). Other co-sponsors include Rep. Scott Garrett (R-NJ), Chair of the Capital Markets Subcommittee and rep. Patrick McHenry (R-NC), Chair of the Oversight Subcommittee of the House Financial Services Committee. 
Rep. Conaway, who is Chair of the House Agriculture Subcommittee on Commodities and Risk Management, also introduced this legislation in the 112th Congress, where it was reported out of the House Agriculture Committee by voice vote.

U.S. businesses and citizens deserve to know the implications of new regulations impacting the futures industry, noted Chairman Conaway.. Just as President Obama’s Executive Order directed government agencies to evaluate the cost of regulations on jobs and the economy, he continued, the legislation will ensure that the CFTC conducts a comprehensive qualitative and quantitative analysis of any future proposed regulations.

In addition to market liquidity, the bill lists a number of other factors that the CFTC must consider in doing the cost-benefit analysis, including price discovery, efficiency, competitiveness and available alternatives to regulation. The CFTC must also consider if the regulation is inconsistent or duplicative of other federal regulations.          

The legislation would also update the CFTC’s current requirements to require the examination of the impacts on the previously unregulated swaps markets, a necessary addition because of new authority given to the CFTC under Dodd-Frank. It also would require the CFTC’s chief economist be involved in the cost-benefit analysis, a recommendation made by the commission’s inspector general. Only future proposed rules would be affected; the legislation would not require retroactive analysis of pending proposals.

Friday, March 15, 2013

Legislation Exempting Financial Firms from Providing G-L-B Act Privacy Notifications if No Change Passes House with Overwhelming Bi-Partisan Support

Legislation amending the privacy provisions of the Gramm-Leach-Bliley Act to exempt financial institutions from providing an annual privacy notice if they have not changed their privacy policies in the last year passed the House by unanimous consent under suspension of the rules. Introduced by Rep. Blaine Luetkemeyer (R-MO), the Eliminate Privacy Notice Confusion Act, H.R. 749, is designed to reduce an unnecessary burden facing consumers and financial institutions alike. Identical legislation passed the House at the end of the 112th Congress on Dec. 12, 2012, but was never taken up in the Senate in the rush to conclude the 112th Congress. However, Rep. Luetkemeyer believes that the Senate will take up the legislation and pass it in the 113th Congress.

The amendments effected by H.R. 749 are to Section 503 of Gramm-Leach-Bliley, dealing with the disclosure of a financial institution’s privacy policy. Section 509 defines a financial institution to mean any institution the business of which is engaging in financial activities as described in Section 4(k) of the Bank Holding Company Act, which includes, in addition to banks, securities underwriting, dealing and market making, as well as providing financial, investment or economic advisory services and advising an investment company.

Under current law, financial institutions of all sizes are required to provide annual privacy notices explaining information sharing practices to all customers. Financial firms are required to give these notices each year even if their privacy policies have not changed in the slightest. According to Rep. Luetkemeyer, this creates not only waste for financial institutions, but confusion among consumers, as well as increased indirect cost to consumers. (Cong. Record, Dec. 3 2012, H6581). He also noted that the legislation will make the mailings more significant to the consumer because they would only come after a change in policy. The sponsor ojef H.R. 749 reiterated that the legislation will only remove the annual privacy notice requirement if a financial institution has not, in any way, changed its privacy policies or procedures. He assure that the legislation does not exempt any institution from an initial privacy notice, nor does it allow a loophole for a financial firm to avoid using an updated notice. (Cong. Record, Mar 13, 2013, H1338).

Rep.Shelley Moore Capito (R-WV), Chair of the Financial Institutions Subcommittee, noted that these annual mailings cost millions of dollars each year and do not provide consumers with new information if the financial institutions have not changed their practice. The legislation will require a financial institution to provide annual privacy notices only if they have changed privacy policies that affect the customer. This is an important, commonsense bill, said the Chair, that will provide further clarity to customers and consumers and eliminate an unnecessary regulatory burden for financial institutions. (Cong. Record, Dec. 3 2012, H6581).

Tuesday, March 12, 2013

House Financial Services Committee Sets Forth Its Oversight Agenda for the 113th Congress

The House Financial Services Committee will conduct an intensive monitoring of the regulatory implementation of the Dodd-Frank Act to ensure that regulators carefully and transparently assess the costs and benefits of regulations called for by the Dodd-Frank Act in order to strike an appropriate balance between prudent regulation and economic growth. As part of its oversight agenda for the 113th Congress, the Committee will also examine the extent to which a lack of global coordination on financial reforms could place the United States financial services industry at a competitive disadvantage.        

The Committee will monitor the impact of the  JOBs Act on the capital markets, investor protections, and the SEC’s implementation of the law to ensure that the Commission fulfills Congressional intent and does not unnecessarily stifle the capital formation initiatives. The Committee will examine the state and operation of the U.S. mutual fund industry, including pending regulatory proposals by the SEC and the FSOC to reform money market mutual funds, and private sector initiatives to improve investor understanding of money market fund valuations.
 
The Committee will also review the impact of Title VII of the Dodd-Frank Act on the operations, growth and structure of the OTC derivatives market. The Committee will explore how the SEC and CFTC are implementing the regulations mandated by the Dodd-Frank Act to govern the OTC marketplace, including how U.S. regulators are coordinating their efforts with foreign counterparts, given the global and interconnected nature of that marketplace. The Committee will closely examine how completed rules are functioning in the marketplace and consider potential legislative and regulatory solutions to clarify the law’s intent.

The oversight panel will examine the continuing role that credit rating agencies, also known as Nationally Recognized Statistical Ratings Organizations (NRSROs), play in the U.S. capital markets, the SEC’s oversight of NRSROs and theur compensation models, and whether NRSRO methodologies accurately reflect the risks associated with different debt instruments. The Committee will examine the impact of the Dodd-Frank Act on competition among current NRSROs, and on new and prospective NRSROs. The Committee will examine the implementation by Federal regulators of provisions found in Section 939A of the Dodd-Frank Act requiring them to establish new standards for evaluating credit-worthiness that do not include references to ratings issued by NRSROs. The Committee will also closely examine any SEC initiatives to insert the government into the assignment of ratings.

During the 113th Congress, the Committee will review the SEC’s regulation and oversight of broker-dealers and investment advisers, including the SEC’s consideration of proposals to impose a harmonized standard of care applicable to broker-dealers and investment advisers when providing personalized  investment advice to retail customers. The Committee will also review proposals that would harmonize the frequency of examinations of broker-dealers and investment advisers.  The Committee will also monitor the coordination between the SEC and the Department of Labor regarding rules governing the provision of advice related to retirement accounts.

The Committee will review the growth and impact of algorithmic trading and the impact that market structure has on retail investors, small public companies and the impact of decimalization on market quality and capital formation. The Committee will review developments and issues concerning corporate governance at public companies and the SEC’s proposals that seek to modernize corporate governance practices. The Committee will examine how the Dodd-Frank Act impacts the corporate governance practices of all issuers, particularly small public companies.
 
The Committee will also examine the services provided by proxy advisory firms to shareholders and issuers to determine whether conflicts of interest exist.

The Committee will continue to monitor the effect that the Sarbanes-Oxley Act of 2002 has on the capital markets and capital formation; the impact of the permanent exemption from Section 404(b) for public companies with less than $75 million in market capitalization; and 6 proposals to further modify this exemption.

The Committee will review the operations, initiatives, and activities of the Securities Investor Protection Corporation, as well as the application of the Securities Investor Protection Act (SIPA). In light of SIPC’s  exposure to the failures of Bernard L. Madoff Investment Securities, Lehman Brothers, and  MF Global, the Committee will examine SIPC’s existing reserves, member broker-dealer  assessments, access to private and public lines of credit, and coverage levels, as well as proposals to improve SIPC’s operations and management. The Committee will also review the impact of the provisions of the Dodd-Frank Act that amend the SIPA, and the work and  recommendations of the SIPC Modernization Task Force.’

The Committee will continue to examine the state and operation of 20 the U.S. mutual fund industry, including pending regulatory proposals by the SEC and the 21 FSOC to reform money market mutual funds, and private sector initiatives to improve 22 investor understanding of money market fund valuations.

The Committee will monitor the joint risk retention rule-making mandated by Section 941 of the Dodd-Frank Act to ensure that the development and implementation of the risk retention rules promote sound underwriting practices without constricting the flow of credit and destabilizing an already fragile housing market, and that those rules appropriately differentiate among multiple asset classes. The Committee will focus particular attention on the joint rulemaking to define a class of qualified residential mortgages (QRMs) that will be exempt from risk retention requirements.

As Congress moves towards creating a private market for secondary mortgage-backed securities, the Committee will review the potential for covered bonds to increase mortgage and broader asset class financing, improve underwriting standards, and strengthen United States financial institutions by providing a new funding source with greater transparency, thereby fostering increased liquidity in the capital markets. The Committee will determine if existing regulatory initiatives, including Treasury’s Best Practices for Residential Covered Bonds and the FDIC’s covered bond policy statement to facilitate the prudent and incremental development of the U.S. covered bond market are sufficient to foster the creation of a covered bond market in the United States or whether  legislation will be needed.

 

Monday, March 11, 2013

EU Securities and Banking Authorities Warn Investors on Contracts for Difference

The European Securities and Markets Authority and the European Banking Authority have issued a joint investor warning on investments in contracts for difference, which are agreements between a buyer and a seller to exchange the difference between the current price of an underlying asset, such as shares, currencies, or commodities  and its price when the contract is closed.

A contract for difference is a share in a derivative product giving the holder an economic exposure to the change in price of a specific share over the life of the contract. Contracts for difference are thus leveraged products that offer exposure to the markets while requiring investors to only put down a small margin of the total value of the tra the time when de. They allow investors to take advantage of prices moving up by taking long positions or prices moving down by taking short positions on underlying assets. When the contract is closed, the investor will receive or pay the difference between the closing value and the opening value of the contract and/or the underlying asset.

Contracts for difference carry a very high level of risk, warned the Authorities. They are not standardized products. Different providers have their own terms, conditions and costs. Therefore, generally, they are not suitable for most retail investors.

The  Authorities advised investors to consider trading in contracts for difference if they wish to speculate, especially on a very short-term basis, or if they wish to hedge against an exposure in yheir existing portfolio, and have extensive experience in trading, in particular during volatile markets, and can afford any losses.

In addition to overall profit and loss risk, there are some specific risks associated with contracts for difference. There is, for example, liquidity risk, which affects the ability to trade at the time one may wish to trade. There is execution risk that is associated with the fact that trades may not take place immediately. There is counterparty risk that the provider issuing the ontract for difference defaults and is unable to meet its financial obligations.

 

States Reply to Government Motion to Dismiss in Action Alleging Dodd-Frank Unconstitutional


Replying to the federal government’s motion to dismiss in an action alleging the unconstitutionality of the Dodd-Frank Act, State Plaintiffs said that by delegating immense power to the Treasury Secretary and FDIC, freeing them from the well-established rules and rights of bankruptcy law, and insulating them against meaningful congressional and judicial oversight, Title II of the Dodd-Frank Act  violates the Constitution. In a memorandum to the court, the States argued that Dodd-Frank violates the Constitution’s separation of powers, the Fifth Amendment right to due process, and the constitutional requirement that the nation’s bankruptcy laws be uniform. State National Bank of Big Spring Texas v. Wolin, U.S. District Court for the District of Columbia, Case No. 1:12-cv-01032 (ESH), Feb. 27, 2013.

The Orderly Liquidation Authority created by Title II superseded the federal Bankruptcy Code with a new legal regime for the liquidation of financial companies, controlled by the Treasury Secretary and the FDIC. As part of this revision to the bankruptcy laws, argued th States, Title II expressly eliminated the federal guarantee that similarly situated creditors will receive equal treatment, by empowering the FDIC to depart from the ordinary rules of bankruptcy law and to discriminate among similarly situated creditors.

The State Plaintiffs have been and continue to be directly and actually injured by Title II’s modification of the bankruptcy laws. The States, including state workers’ pension funds, invest in the debt of financial companies that could be liquidated under Title II.

In its motion to dismiss, the Government asserted that the State Plaintiffs’ alleged injury is limited to financial loss that they could suffer in a future liquidation under Title II’s Orderly Liquidation Authority. But the State Plaintiffs said that they have already been injured by Dodd-Frank’s abridgement of their valuable statutory right to be treated equally among similarly situated creditors, a right guaranteed to them by pre-Dodd-Frank bankruptcy law.

The Government further argued that the State Plaintiffs must defer litigation of their constitutional claims unless and until a long chain of events occurs: namely, when the Government uses Title II to liquidate a company of which the State Plaintiffs are creditors, and the FDIC treats the State Plaintiffs differently from other similarly situated creditors, and the State Plaintiffs receive less than they would have received in a purely hypothetical Chapter 7 bankruptcy scenario, and the State Plaintiffs exhaust their administrative remedies at the FDIC. Only then, according to the Government, can the State Plaintiffs litigate their constitutional claims.

 

But the State Plaintiffs argue that the Government is ignoring the injury that the States already suffer by Title II’s very terms and that much-delayed route to judicial review of the State Plaintiffs’ constitutional claims. The Government fails to note that Dodd-Frank expressly prohibits the States from litigating these claims once the Treasury Secretary initiates a liquidation. Specifically, Title II bars the State Plaintiffs from litigating those issues in judicial review of the Treasury Secretary’s decision to begin a liquidation; it bars the State Plaintiffs from litigating those issues in judicial review of the FDIC’s execution of the liquidation process; and it purports to bar the State Plaintiffs from litigating those issues in other courts once a liquidation occurs.  Simply put, the choice is not between the court hearing these claims before a liquidation occurs and hearing them after the FDIC completes its work, as the Government suggests. Rather, Dodd-Frank forces the courts either to hear these claims before a Title II liquidation occurs, or never at all.

 

The enactment of Dodd-Frank’s Title II caused a here and now  injury by modifying the federal bankruptcy laws to abridge the State Plaintiffs’ rights as creditors. The State Plaintiffs said that they have standing to bring these claims, which are ripe. They urged the court to deny the  Government’s motion to dismiss.

 

Friday, March 08, 2013

House and Senate Legislation Would Repeal Bank Swaps Push-Out Provision of Dodd-Frank Act

Bipartisan legislation has been introduced in the House and Senate to modify Section 716 of the Dodd-Frank Act, the bank swaps push-out provision. In the House, the Swaps Regulatory Improvement Act was introduced by Reps. Randy Hultgren (R-Ill) and Jim Himes (D-Conn), members of the Financial Services Committee, and Reps. Richard Hudson (R-NC) and Sean Patrick Mahoney (D-NY), who serve on the House Agriculture Committee. The legislation would amend Section 716 to ensure that federally insured financial institutions can continue to conduct risk-mitigation efforts for clients like farmers and manufacturers that use swaps to insure against price fluctuations. The bill modifies Section 716 to allow commodity and equity derivatives in banks with federal deposit insurance. Senate Banking Committee members Senators Kay Hagen (D-NC) and Patrick Toomey (R-Pa), along with Agriculture Committee members Senators Mike Johanns (R-Neb) and Mark Warner (D-Va), have introduced companion legislation.

This legislation mirrors the final version of H.R. 1838 that the Financial Services Committee unanimously reported out to the House in the 112th Congress. An amendment to H.R. 1838 offered by Rep. Himes, and unanimously approved by the Committee, carved out risky instruments, such as structured swaps and asset-backed securities, and is included in the Swaps Regulatory Improvement Act of 2013. These are swaps that are the most risky and should be pushed out of banks.

Currently, under Section 716, federally insured banks would not be permitted to conduct certain swaps trading, including trading of commodity, equity, and credit derivatives, thus compelling the banks to push out that activity into separately capitalized non-bank affiliates. By prohibiting this activity in federally insured institutions, regulators would lose some oversight. This legislation will ensure that these swaps take place within institutions that are more closely monitored by federal regulators.
Under Section 716, insured depository institutions must push out all swaps and security-based swaps activities except for specifically enumerated activities, such as hedging and other similar risk mitigating activities directly related to the insured depository institution’s activities. Section 716 prohibits federal assistance, including federal deposit insurance and access to the Fed discount window to swap entities in connection with their trading in swaps or securities-based swaps. This section would effectively require most derivatives activities to be conducted outside of banks and bank holding companies.

When Congress was crafting the Dodd-Frank Act, financial regulators raised concerns about the risk involved with this provision. For example, then–FDIC Chairman Sheila Bair said that if all derivatives market making activities were moved outside of bank holding companies, most of the activity would no doubt continue, but in less-regulated and more highly leveraged venues.
The legislation is designed to ensure that derivatives trading units can be overseen by financial regulators and increase the capital available to finance job creation and economic activity.

The securities industry supports the legislation as a bipartisan, bi-cameral recognition that Section 716 was an ill-conceived provision, one that elicited strong reservations from multiple federal prudential regulators when originally adopted and still today. According to SIFMA, the legislation will forestall a misguided action that would force swaps to migrate to other entities that are not subject to prudential regulation, and could likely increase systemic risk instead of reducing it.

Senate Legislation Would Reform Rulemaking Process for SEC and Other Federal Regulators and SROs

Senator Richatd Shelby (R-ALA) has introduced legislation to improve the transparency and accountability of the federal regulatory process and reduce the burdens of existing regulations. The Financial Regulatory Responsibility Act of 2013 holds the SEC and other financial regulators accountable for rigorous, consistent economic analysis of every new regulation they propose.  It requires them to provide clear justification for the rules, and to determine the economic impacts of proposed rulemakings, including their effects on growth and net job creation.  If the costs of a rule outweigh its benefits, regulators will be prohibited from adopting the rule.  Importantly, the legislation would require the SEC and CFTC to develop a plan for requiring SROs under their jurisdictions to apply the reforms in the bill to their rulemaking process.

For every proposed rulemaking, the bill would require agencies to conduct an economic analysis that includes, at a minimum, twelve elements. The elements are to identify the need for the regulation and the regulatory objective, including identification of the nature and significance of the market, to explain why the private market or State, local, or tribal authorities cannot adequately address the identified market failure or other problem; and to analyze the magnitude of adverse impact to regulated entities and other market participants. The elements also require the SEC and other regulators to do a quantitative and qualitative assessment of all anticipated direct and indirect costs and benefits of the regulation as compared to a benchmark that assumes the absence of the regulation, including compliance costs; effects on economic activity, net job creation, efficiency, competition, and capital formation; as well as regulatory administrative costs and the costs imposed by the regulation on State, local, or tribal governments.

The SEC and other agencies would also have to identify and assess all available alternatives to the regulation, including modification of an existing regulation or statute, together with an explanation of why the regulation meets the objectives more effectively than the alternatives, and if the agency is proposing multiple alternatives, an explanation of why a notice of proposed rulemaking, rather than an advanced notice of proposed rulemaking, is appropriate; and if the regulation is not a pilot program, an explanation of why a pilot program is not appropriate.

Other required elements would include an assessment of the extent to which the regulation is inconsistent, incompatible, or duplicative with the existing regulations of the agency or

those of other domestic and international regulatory authorities with overlapping jurisdiction; and a description of any studies, surveys, or other data relied upon in preparing the analysis; as well as an assessment of the degree to which the key assumptions underlying the analysis are subject to uncertainty; and an explanation of predicted changes in market structure and infrastructure and in behavior by market participants, including consumers and investors.

Wednesday, March 06, 2013

Bi-Partisan and Scalable Senate Legislation Being Readied to End Too Big to Fail

Senators Sherrod Brown and David Vitter are preparing bi-partisan legislation that will create a two-tier scalable regulatory framework for financial institutions and end too big to fail. In remarks on the Senate floor, Senator Vitter said that the legislation, which will soon be introduced, will try to walk federal  regulator away from Basel III and institute new capital rules that do not rely on risk weights and are simple and easy to understand and are transparent and cannot be gamed the way the Senators think the  Basel III Accord can be manipulated and gamed.  In the view of the Senators, requiring this would do one or both of two things. It would better ensure the taxpayer against bailouts and/or  it would push the large global financial institutions  to restructure because they would be bearing more cost of that risk to the financial system. (Cong. Record, Feb, 28, 2013, S. 996).

In addition, the legislation  will be scalable and crate a two-tier system under which smaller and to pay less risky financial institutions, such as community banks  would be subject to a  more appropriate regulatory framework. The legislation  will also fundamentally require significantly more capital for the large financial institutions and distinguish between those institutions and other financial firms, such as namely, community banks, midsized banks, and regional banks. The largest financial institutions  would have to pay significantly higher capital requirements under the Brown-Vitter bill.

When these large financial institutions  go into the capital markets, noted Senator Brown, they get the advantage of up to  80 basis points because the capital markets believe their investments in thesefirms are not very risky because the markets believe that they  are too big to fail. Cong Rec. Feb 28, 2013, S. 966).

While Senator  Brown’s proposed amendment, S.Amdt. No. 3733,       to the Dodd-Frank Act to impose leverage and liability limits on bank holding companies and financial companies failed in 2010 in the runup to the passage of the Act was defeated by a vote of 61-33, the Senators believe that a strong consensus is building today towards passage of similar legislation. Three Republican Senators voted for the Brown Amendment, and that did not include Senator Vitter, who did not vote on the amendment. They pointed out that Senator Elizabeth Warren has joined the Senate and is expected to be a strong proponent of the legislation.

Just as Senator Sherman spoke against the trusts in the late 19th century, noted Senator Brown, today people across the political spectrum, both parties and all ideologies, are speaking about the dangers of the large, concentrated wealth of large financial institutions.According to the Comptroller of the Currency, said Senator Brown, none of these large financial holding companies have  adequate risk management.. In stress tests, not one of the largest 19 financial institutions  has shown adequate risk management.

Bi-Partisan House Legislation Would Impose Deadline on SEC to Adopt Regulations Implementing JOBS Act Regulation A Provisions

House legislation with strong bi-partisan support would impose a deadline on the SEC to adopt regulations effectuating the JOBS Act provisions raising the Regulation A exemptive threshold from $5 million to $50 million. The legislation, HR 701, was introduced by Rep. Patrick McHenry (R-NC), Chair of the Oversight Subcommittee of the House Financial Services Committee, and is co-sponsored by among others, Rep. Anna Eshoo (D-CA), Rep. David Scott (D-GA), and Rep. Scott Garrett (R-NJ), Chair of the Capital Markets Subcommittee. 

Regulation A offers small businesses an exemption from the registration requirements of the Securities Act. The JOBS Act requires the SEC to amend Regulation A by raising its threshold from $5 million to $50 million and adopt new regulations resolving issues that have made Regulation A unfeasible to date.

 Section 401 of the JOBS Act created a new subsection (2) to Section 3(b) of the Securities Act that requires the Commission to adopt an exemption allowing companies to issue up to $50 million in securities subject to certain conditions and requirements. The JOBS Act does not set out a specific timetable for Commission rulemaking action under Section 401. H.R. 701 would set a deadline of Oct. 31, 2013 by which the SEC must adopt regulations implementing Section 401.

Chairman McHenry said that the legislation codifies an intended deadline for Regulation A as part of the JOBS Act. The target date is reasonable, he noted, nearly 19 months after the JOBS Act was signed into law and 5 months before the official SEC review of the new Regulation A offering limitations would need to occur. Rep. Eshoo said that H.R. 701 puts the SEC on deadline to finalize new Regulation A rules so that startup businesses can have access to additional capital. When Congress raised the SEC Regulation A offering limit, she explained, it did so because it was essential in meeting the capital formation needs of startup businesses. Now, emphasized Rep. Eshoo, it’s the SEC’s turn to follow through.

In a letter to the SEC last September, the Federal Securities Regulation committee of the ABA urged the SEC to act promptly to propose and adopt implementing rules under Section 401. The ABA group believed that this can be achieved by the Commission importing into its rules under Section 3(b)(2) certain aspects of Regulation A while raising the dollar threshold applicable to the exemption and adding some investor protection enhancements. This will help to achieve the Congressional purpose of assisting smaller companies in raising the capital they need to spur growth and create jobs.