Thursday, March 15, 2018

Senate passes financial reform corrections bill with securities provisions

By Mark S. Nelson, J.D.

The Senate passed a bill that would reduce the regulatory burdens imposed by the Dodd-Frank Act on community banks but that also would address numerous securities issues, such as the definition of “covered securities.” The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), sponsored by Senate Banking Committee Chairman Mike Crapo (R-Idaho), also contains provisions dealing with algorithmic trading in securities markets, the financial exploitation of seniors, cybersecurity, and hedge fund names. Although senators submitted more than 150 amendments, the only substantive amendment came in the form of a manager’s amendment (S. Amdt. 2151) consisting of a substitute version of the bill that added banking and consumer provisions and which was adopted 67-31, while the final version of the bill passed by the same margin.

Democrats split over financial rules. During the nearly week-long debate after the Senate voted to proceed on the Crapo bill, a group of Democrats joined Republicans in supporting the bill, highlighting a divide among Senate Democrats. Senator Crapo and others supporting the bill emphasized how it will right size financial regulations. Shortly before senators mulled Sen. Crapo’s substitute bill, he rejected the critique that the legislation would weaken Fed oversight and he cited a colloquy from another occasion between himself and Fed Chairman Jerome Powell, who said the Fed would still have adequate authorities.

Senator Heidi Heitkamp (D-ND) and Sen. Tom Carper (D-Del) each took the Senate floor to debunk what they said were myths about the Crapo bill. For example, Sen. Heitkamp noted that the Volcker rule would not be weakened, although the Crapo bill would provide relief to banks controlled by companies with no more than $10 billion in total consolidated assets and trading assets and liabilities no greater than 5 percent of total consolidated assets.

Senator Elizabeth Warren (D-Mass) led those opposed to the bill, suggesting that its fixes were actually giveaways to the biggest banks and could set the stage for the next financial crisis. The senator had submitted 17 proposed amendments, but also introduced separate legislation that she said would ensure criminal accountability for bank executives. Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio), noting that it was the tenth anniversary of the collapse of Bear Stearns, focused on how the bill could weaken oversight of foreign banks doing business in the U.S. and how it requires the tailoring of bank rules.

By contrast, one of the Dodd-Frank Act’s namesakes, former Sen. Chris Dodd (D-Conn), said in an op-ed piece published in The Hill that he supported the Senate Banking Committee’s bipartisan effort to craft needed revisions to the financial reform package enacted in 2010. Although Dodd said the $50 billion bank asset threshold for enhanced prudential standards should be raised, he questioned the wisdom of raising the threshold to $250 billion. He further noted, however, that Dodd-Frank’s “core elements” would be left in place.

Despite the presence of a dozen securities provisions in the amended Crapo bill, the debate over the bill focused almost exclusively on a small number of banking provisions. Perhaps the most controversial securities provision would remove the SEC from the process for approving certain exchange listing standards. Overall, the securities provisions in the Crapo bill fall into the seven broad categories summarized below.

Exchanges. The National Securities Markets Improvement Act of 1996 re-allocated and clarified the division of duties between federal and state securities regulators, including by defining the term “covered securities.” Section 501 of the Crapo bill would amend Securities Act Section 18(b)(1) to achieve parity among national securities exchanges by revising the term “covered securities,” but it also would end the role currently played by the Commission in determining whether listing standards are substantially similar to those of specified exchanges.

Capital formation. The Crapo bill would aid capital formation by opening Regulation A to more companies and by closing a gap in Jumpstart Our Business Startups (JOBS) Act. The bill also would require the Commission to have greater role in the work of an advisory body on capital formation issues.

Under Section 508, the Commission would be directed to remove the requirement under Rule 251 of Regulation A that an issuer of securities must satisfy a variety of requirements, including that the issuer is not subject to reporting under Exchange Act Sections 13 or 15(d) immediately before the offering. Rule 257 also would have to be amended to conform to the revision to Rule 251 (See, H.R. 2864, which passed the House 403-3).

Section 504 includes the Supporting America’s Innovators Act of 2017 (See, H.R. 1219 and S. 444) and would amend the Investment Company Act to fix an oversight by the JOBS Act that left in place a 1940s-era investor threshold that hinders investments by venture capital funds. Specifically, the bill would amend the exemption in Investment Company Act Section 3(c)(1) to apply to a qualifying venture capital fund with up to 250 persons. “Qualifying venture capital fund” would be defined as a venture capital fund with no more than $10 million in aggregate capital contributions and uncalled committed capital, as periodically indexed for inflation.

Under Section 503, the Commission would have to review findings and recommendations submitted by the Government-Business Forum on Capital Formation and publicly disclose any action the Commission plans to take on any recommendation. The House passed identical legislation (H.R. 1312) by a vote of 406-0, while S. 416 passed the Senate by unanimous consent.

Investment companies and advisers. Under the Crapo bill, closed-end companies would get broader proxy powers, while Puerto Rico and other U.S. territories would achieve regulatory parity with mainland U.S. rules for investment companies. Certain hedge funds also would be allowed to have names that would be prohibited under current banking regulations.

Section 509 contains a provision that would allow closed-end companies to use offering and proxy rules currently available to operating companies. The SEC would have to adopt regulations to implement this provision within two years of enactment. The Commission also would have to mull the amount of disclosure needed to be a well-known seasoned issuer. Moreover, the Crapo bill provision includes text that tracks an amendment offered by Rep. Bill Foster (D-Ill) to the equivalent House bill, which would extend parity to interval funds that make periodic repurchase offers. However, regardless of the Crapo bill provision, a registered closed-end company could still invoke Securities Act Rule 482 with respect to the distribution of sales materials.

Section 506 contains text equivalent to the U.S. Territories Investor Protection Act of 2016 (See, H.R. 1366 and S. 484), which strikes the text of Investment Company Act Section 6(a)(1) to bring U.S. territories within the Investment Company Act via a transitional period that the Commission may extend for up to six years. A similar bill previously sailed through the House Financial Services Committee and was approved by the House by voice vote. The Senate likewise approved an identical bill by unanimous consent.

Section 204 of the Crapo bill would permit a hedge fund or private equity fund to have the same name as a banking entity that is an investment adviser to the fund, provided that the investment adviser is not an insured depository institution or bank holding company, does not have the same name as an insured depository institution or bank holding company, and the name does not use the word "bank."

Technology provisions. Two provisions in the Crapo bill address technology developments. Under Section 502, the SEC would have to submit a report to Congress on algorithmic trading. Likewise, the Treasury Department would have to report to Congress under Section 216 regarding the preparedness of federal banking regulators and the SEC to handle cybersecurity issues.

Registration exemption—compensatory benefit plans. Section 507 of the Crapo bill would direct the Commission, within 60 days of enactment, to revise Securities Act Rule 701(e) to raise the additional disclosure threshold with respect to compensatory benefit plans from $5 million to $10 million, adjusted for inflation (See, H.R. 1343, which passed the House 331-87, and S. 488, which passed the Senate by unanimous consent).

SEC administration. Under Section 505 of the Crapo bill, which contains the Securities and Exchange Commission Overpayment Credit Act (See, H.R. 1257 and S. 462), and which cleared the House FSC 59-0 and passed the Senate by unanimous consent, the SEC would have to credit future fee assessments of national securities exchanges and associations for overpayments the exchanges or associations made and informed the SEC of within a ten year period. The provision, however, would apply only to fees required to be paid before enactment of the Crapo bill.

Protection of seniors. Section 303 of the Crapo bill would protect employees of financial institutions from liability when they report the suspected financial exploitation of a senior citizen to a covered agency. The provision would apply to individuals and to “covered financial institutions,” which term includes investment advisers, broker-dealers, and transfer agents. The provision also would impose training and recordkeeping requirements. The provision defines “covered agency” to include state securities regulators, the SEC, and registered securities associations.