Monday, November 20, 2017

House FSC approves Dodd-Frank repeals plus capital formation, Fed bills

By Mark S. Nelson, J.D.

The House Financial Services Committee engaged in a two-day markup session of nearly two dozen securities and banking bills spanning a range of topics, including Dodd-Frank Act repeals, hedge funds and private equity, business development and closed-end companies, capital formation, proxy advisers, non-bank financial institutions, Fed oversight, and Iran disclosures. The markup and approval of all 23 bills followed a prior House FSC hearing that considered many of the same bills (See vote scorecard).

Dodd-Frank Act repeals. A trio of bills would repeal two of the specialized securities disclosure obligations imposed by the Dodd-Frank Act plus the settlement title of the reform bill. The provisions to be repealed would include:
  • Conflict minerals—Repeal of Dodd-Frank Act Section 1502 (H.R. 4248). 
  • Mine safety—Repeal of Dodd-Frank Act Section 1503 (H.R. 4289). 
  • Restoring Financial Market Freedom Act of 2017 (H.R. 4247)—Repeal of Dodd-Frank Act Title VIII regarding payment, clearing, and settlement. 
By comparison, the Financial CHOICE Act (H.R. 10) would repeal the entirety of the specialized disclosure provisions, including the authority for the SEC’s resource extraction issuer’s rule (Congress disapproved the SEC’s resource extraction issuers rule earlier this year via the Congressional Review Act), plus required studies of inspectors general and of core and brokered deposits. The Treasury Department's report on capital markets, published as part of a review of financial regulations in light of core principles announced by the Trump Administration, recommended repeal of provisions on conflict minerals, mine safety, and resource extraction issuers, and that related SEC rules be withdrawn. The report also urged Congress to transfer the subject matter of these provisions to other agencies if lawmakers were to continue the specialized disclosure regime.

With respect to conflict minerals, the SEC’s recent guidance rolling back the due diligence requirement did not otherwise eliminate the need for U.S. companies to comply with the conflict minerals rule and many firms continued to make the same level of disclosure in 2017 as they had in prior filings. Similar European regulations will come online in January 2021 and will impact European Union importers whose conflict minerals imports are above specified volume thresholds.

Hedge funds and private equity. The Investor Clarity and Bank Parity Act (H.R. 3093) would amend the Bank Holding Company Act to permit hedge funds and private equity funds to use the same name or a variation of a name that the fund has in common with a banking entity that is an investment adviser to the fund if the fund meets certain requirements, which include that the investment adviser not be an insured depository institution, share a name with such institution, or use “bank” in the fund’s name. Currently, BHCA Section 13 (12 U.S.C. §1851) provides that federal regulators can permit banking entities to engage in certain activities despite the Volcker rule ban on many forms of proprietary trading, including organizing or offering a private equity or hedge fund if, among other things, the fund does not share the banking entity’s name.

Investment companies. The Small Business Credit Availability Act (H.R. 4267) would alter the asset coverage requirement for business development companies (BDCs), such that the general requirement would be set a 200 percent, although a separate provision would set the requirement at 150 percent if the BDC meets specified criteria.

The Expanding Investment Opportunities Act (H.R. 4279), like H.R. 4267, makes similar changes for closed-end companies with respect to achieving parity with other companies regarding the use of the SEC’s proxy rules by requiring the Commission to revise numerous rules and Form N-2. Both H.R. 4267 and H.R. 4279 would allow BDCs and closed-end companies to use the proxy rules available to operating companies as if these rule changes had been made should the Commission not implement them within the specified time frame.

With respect to H.R. 4279, Rep. Bill foster (D-Ill) offered an amendment to ensure true parity between closed-end companies and operating companies. Specifically, the Foster amendment would extend parity to interval funds, which are listed or have periodic redemptions, by requiring the SEC to issue a rule treating these funds as well-known seasoned issuers. The amendment was approved by voice vote.

Capital formation. Under H.R. 4263, currently untitled but referred to by the House FSC as the Regulation A+ Improvement Act of 2017, Securities Act Section 4(b) would be amended to raise the Regulation A Tier 2 limit from $50 million to $75 million with an inflation adjustment every two years. The bill also would revise the Commission’s review duties with respect to the Tier 2 limit by requiring the Commission to further raise the Tier 2 limit in addition to the periodic inflation adjustment, as appropriate, every two years.

The Commission’s release adopting the two-tiered framework for Regulation A also preempted Tier 2 offerings from state registration and qualification requirements with respect to qualified purchasers. The Commission adopted these changes to implement portions of the Jumpstart Our Business Startups (JOBS) Act to make the then-seldom used Regulation A more attractive to issuers and investors. The Commission has since made additional changes to its related rules to facilitate small offerings.

The Expanding Access to Capital for Rural Job Creators Act (H.R. 4281) would amend the SEC Small Business Advocate Act of 2016 (Pub Law No. 114–284), which had revised Exchange Act Section 4 to establish at the SEC the Office of the Advocate for Small Business Capital Formation. As constituted, the new office’s goals include the identification of unique capital formation problems faced by minority- and women-owned small businesses. The bill would expand the office’s goals to include issues faced by rural-area small businesses.

Proxy adviser registration. Representative Sean Duffy (R-Wis) re-introduced legislation that would regulate proxy advisory firms. Similar language also was included in the CHOICE Act. The bill also is similar to one Rep. Duffy sponsored in the 114th Congress (H.R. 5311) and which was reported by the House FSC 41-18. Moreover, the Treasury Department's report on capital markets cited a GAO study and the SEC’s proxy plumbing concept release on the growing concerns about proxy advisers’ influence, but the report did not take a position on proxy advisory firm regulation and instead recommended further study.

The Corporate Governance Reform and Transparency Act of 2017 (H.R. 4015) would require proxy advisory firms to register with the Commission. A “proxy advisory firm” is any person primarily engaged in the business of providing proxy voting research, analysis, ratings, or recommendations that would be a solicitation under Exchange Act Section 14, unless the person is exempted from the related rules. “Persons associated with a proxy advisory firm” also would be subject to bill’s requirements, although clerical and ministerial workers would be excluded from the definition.

Moreover, the bill would require a proxy advisory firm to base its voting recommendations on accurate and current information. A firm would have to develop procedures to afford a company access to draft recommendations within a reasonable time and to allow the company to offer meaningful comments. A proxy advisory firm would have to employ an ombudsman to handle complaints; a firm would also have to appoint a compliance officer. A proxy advisory firm would have to establish written policies and procedures that are reasonably designed to manage conflicts of interest.

The Commission would have to issue rules on prohibited conduct, such as unfair, coercive, or abusive acts, including making recommendations subject to the purchase of other services. The bill would deny a right to a private cause of action generally, and would deprive those who might challenge a proxy advisory firm’s filings with the Commission the right to sue under Exchange Act Section 18.

The bill also would impose various reporting requirements. A proxy advisory firm would have to confidentially file with the Commission data on its financial condition, report annually to the Commission on shareholder proposals reviewed and recommendations made, and file with the Commission (and publish) its methodology for issuing policies and for making recommendations. The Commission would have to publish an annual report on proxy advisory firms on its website.

Living wills and Dodd-Frank Act Section 165. Three bills would amend Dodd-Frank Act Section 165 to address a range of issues. The Financial Institution Living Will Improvement Act of 2017 (H.R. 4292) would provide that non-bank financial institutions be required to report to banking regulators on their living wills no more frequently than every two years; the bill also would require regulators to provide feedback to such institutions on submitted plans within six months, and to publicly disclose the assessment framework used to review these plans.

The bill was motivated by three recommendations set forth in a GAO report on resolution plans. Representative Carolyn Maloney (D-NY), supporting the bill’s sponsor, Rep. Lee Zeldin (R-NY), said the bill codifies the GAO’s recommendations, which she said regulators had already implemented. She also noted that the bill helps to keep bankruptcy as the first option, with liquidation under Dodd-Frank Act Title II only as a backstop. House FSC Chairman Jeb Hensarling (R-Tex) called the bill one of the most important under consideration in this markup session.

Ranking Member Maxine Waters (D-Cal) offered an amendment that would deem the living will of any large bank that is found by the Consumer Financial Protection Bureau to have engaged in a pattern or practice of consumer violations to be not credible; such a bank would be subjected to heightened oversight. This first amendment by Rep. Waters was rejected 26-34. Representative Waters also offered a second amendment that would clarify that the review framework would include a true two-year review cycle and would allow regulators to use existing authorities to get mid-cycle updates; Rep. Waters’s second amendment was adopted by voice vote.

Under the Stress Test Improvement Act of 2017 (H.R. 4293), banking regulators would have to provide more details about the methodologies employed in the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test provisions of Section 165. The bill also would limit the frequency of CCAR to once every two years.

Lastly, the Prevention of Private Information Dissemination Act of 2017 (H.R. 4294) would subject a person who willfully discloses individually identifiable information submitted under Section 165 to a misdemeanor charge and fine of up to $5,000. Likewise, a person who obtains such information under false pretenses would be subject to an equivalent charge and fine. Sponsor Rep. David Kustoff (R-Tenn) said the bill was motivated by news reports based on alleged leaks of information about rejected living wills that could have moved markets regarding the affected banks.

Fed oversight. The Fed would be subjected to additional congressional oversight with respect to monetary policy by an interrelated collection of three bills. The Monetary Policy Transparency and Accountability Act of 2017 (H.R. 4270) would require the Fed to state in plain English a singular monetary policy strategy. Representative Andy Barr (R-Ky) argued that the bill would address concerns with the Fed’s current data-dependent approach to policy making. Meanwhile, Rep Waters objected that the bill’s reference to “exactly 1 monetary policy strategy” could be interpreted to undermine the Fed’s dual mandate of maximum employment and price stability.

Under the Independence from Credit Policy Act of 2017 (H.R. 4278), the Fed would have to clear its balance sheet of many assets purchased through emergency programs or its quantitative easing policy by transferring them to Treasury for the equivalent market value of Treasury securities. The Congressional Accountability for Emergency Lending Programs Act of 2017 (H.R. 4302) would further limit the Fed’s authority to conduct emergency programs, including denying eligibility to insolvent borrowers.

Iran legislation. The Iranian Leadership Asset Transparency Act, as amended, (H.R. 1638) requires the Treasury secretary to report to Congress regarding the assets of senior Iranian officials for purposes of preventing terrorism, money-laundering, and compliance with existing sanctions. The bill would define “funds” with reference to Section 2(a) of the Securities Act and to Section 3(a) of the Exchange Act. Exchange Act Section 13(r) contains additional Iran disclosure requirement for issuers.

The Strengthening Oversight of Iran’s Access to Finance Act (H.R. 4324) would require the Treasury Secretary to report to Congress regarding business deals involving aircraft sales under the Joint Comprehensive Plan of Action (JCPOA). The JCPOA is an agreement between the U.S., Iran, and other major powers that seeks to limit Iran’s nuclear weapons programs in exchange for allowing limited business contacts between Iran and participating countries, including the sale of commercial passenger aircraft.