Thursday, May 29, 2014

IAASB Chair says Proposed Audit Report Model Will Increase Transparency and Usefulness as Acceptance of Int’l Audit Standards Grows

As the number of countries using or committed to using international audit standards (IAS) has passed 100, IAASB Chair Arnold Schilder said it is of the utmost importance to completely reform the current pass/fail auditor report on financial statements to make it more useful to investors and to other users of financial statements. In recent remarks to the Pan African Federation of Accountants, the Chair noted that a key and radical innovation to the auditor’s report is the introduction of key audit matters, which the PCAOB proposed reform refers to as critical audit matters. The objective of this new standard is that auditors will communicate publicly those matters that, in the auditor’s judgment, were of most significance in the audit of the financial statements. This will be required for the audits of financial statements of listed entities; with the Board encouraging  wider applicability established by law or regulation or on a voluntary basis.

Key audit matters would be selected from what the auditor has communicated with the audit committee, and based on the auditor’s judgment about what of those communications is most relevant to external users of the financial statements. It is of the essence of key audit matters that they are relevant to readers of financial statements,  reasoned  the IAASB Chair, adding that they must not and  should not be boilerplate, but  rather be tailor-made to that specific audit. The key audit matters  also should not include original information that  management should disclose, continued the Chair, but it is  expected that the one will stimulate the other. Key audit matters will often refer to specific disclosures in the financial statements.

 In the U.K., where the Financial Reporting Council has mandated a similar proposal, there are over 80 examples, and key audit matters often deal with complex issues such as the valuation of goodwill, the valuation of financial instruments, or tax provisions.

While acknowledging that the proposed innovation in auditor reporting is a  radical change, Chairman Schilder said that it would  make the auditor’s work more transparent and relevant to users. It would also stimulate public debate and analysis on what auditors’ reports are most helpful. He also conceded that it would be a difficult change for auditors, who lack a tradition of communicating to the public anything more than their overall conclusion.

But, the Chair is encouraged by auditors who have done or tested this already.  They tell the  Board  that the engagement partner and team often will have an intuitive assessment of the areas of most significance or difficulty. He mentioned that  the auditor’s report on Rolls Royce in the U.K. is seen as a best-in-class example. Auditors are proud of what they now are stimulated to do, and what they can demonstrate regarding their expertise, quality and relevance. He pledged that the IAASB will work hard to finalize soon the  standards and guidance to stimulate and assist this important breakthrough.


Sovereignty Challenge to Globally Congruent Accounting Standards Being Met says IASB Vice Chair

Noting  the globalization of capital markets and financial reporting, IASB Vice Chair Ian Mackintosh emphasized the high importance of having globally congruent international accounting standards. It makes no sense for each and every country to maintain its own different set of accounting standards, he averred, especially at a time when investors need cross-border comparisons, multinational companies need to avoid  the cost of multiple reporting requirements, and regulators need a globally consistent measurement of financial performance on which to base their initiatives. But in recent remarks, the Vice Chair said that sovereignty threaten the goal of globally consistent IFRS.

If each jurisdiction uses a different set of accounting standards, the basis for coming up with even the most well understood of numbers, such as revenue or net profit, can be very different. A famous example of this from the automotive sector occurred back in 1993 when Daimler-Benz switched from German accounting principles to US GAAP in order to become the first German company with a secondary listing in New York. A profit of around 600 million Deutschmarks that had been recorded using German GAAP turned into a loss of almost 2 billion Deutschmarks when reporting using US GAAP. This helps to explain why the G20 Leaders have consistently supported the work of the IASB and expressed their repeated support for global accounting standards and the goal of a global language for financial reporting.

For global IFRS to work,  noted the IASB Vice Chair,  each country must agree to stick to the internationally agreed standards and to resist the temptation to tinker with the standards. A failure to adopt a global standard, or a decision to amend or add to that global standard means it simply isn’t a global standard any more, reasoned the IASB senior official.

Recognizing that adopting verbatim the standards of an international body cuts across the notion of sovereignty, the IASB has been working diligently to develop a multi-national standard setting process that will allow a country to comfortably adopt IFRS without any tinkering. The Board has invested heavily in sophisticated outreach and stakeholder engagement programs to ensure that the views of all constituents across all parts of the world are heard as part of the standard setting process. Also, there are high levels of international diversity at all levels of the IASB. For example, the Board has almost thirty different nationalities among its technical staff, he pointed out, and the membership of various advisory bodies is also highly international.

Moreover, during 2013, the Board took further steps to emphasize the multilateral nature of the standard setting process. Central to this effort was the creation of the Accounting Standards Advisory Forum, to bring in national and regional bodies with responsibility for accounting standard setting within those jurisdictions.

In addition, he noted that there are safeguards in place to ensure that the IASB is not simply passing down diktats from an ivory tower. Many jurisdictions have implemented endorsement mechanisms to act as a form of sovereignty circuit-breaker. The existence of this mechanism avoids a situation where IFRS developed by the IASB are automatically written into jurisdictional law. Some of these endorsement mechanisms, such as the one in Europe, involve multiple steps and evaluations to assess whether the adoption of that particular new IFRS is in the interests of the jurisdiction.




Mark Carney, FSB Chair and Bank of England Gov., says SIFI Designations Integral to Ending TBTF

With Congressional oversight of SIFI designations increasing, especially the role of the Financial Stability Board, a leading global regulator said that an imperative condition precedent to ending too big to fail is the identification of all systemically important financial firms and subjecting them to higher standards of resilience. Mark Carney, Bank of England Governor and Chair of the Financial Stability Board, added that policy makers and regulators must also develop a range of tools to ensure that, if they do fail, the firms can be resolved without severe disruption to the financial system and without exposing the taxpayer to loss.

In recent remarks, the central banker and FSB chief noted that the G20 leaders have endorsed measures to end too-big-to-fail. In response, the Financial Stability Board has developed methodologies and begun to identify systemically important financial institutions. This is the year to complete that job, emphasized the Chair. Governments must introduce legislative reforms to make all systemically important companies resolvable.

The  FSB is developing proposals, for the G20 summit in Brisbane, on total loss absorbing capacity for financial institutions, so that private creditors stand in front of taxpayers when banks fail. In addition, the FSB is working with industry to change derivative contracts so that all counterparties stay in while the resolution of a failing firm is underway.

It is absolutely imperative and integral to the financial markets for policy makers and regulators to end too big to fail, averred Mr. Carney, adding that the most severe blow to public trust during the financial crisis was the revelation that there were scores of too-big-to-fail institutions operating at the heart of finance. That unjust sharing of risk and reward contributed directly to inequality, he noted,  but, more importantly, it  has had a corrosive effect on the broader social fabric of which finance is part and on which it relies.


Senator Menendez Urges SEC to Quickly Finalize Dodd-Frank Pay Ratio Regulations

Citing new data on pay disparity, Senator Robert Menendez (D-NJ) urged the SEC to quickly finalize the pay ration regulations mandated by Section 953(b) of the Dodd-Frank Act. Under Section 953(b) the SEC must adopt rules requiring new disclosures about the ratio between the median of the annual total compensation of an issuer's employees and the annual total compensation of the issuer's chief executive officer. The SEC proposed the pay ratio rules in September of 2013 in changes to Regulation S-K, Item 402.

In a letter to the SEC, Senator Menendez, the author of Section 953(b), said that the new report analyzed recent filings from publicly-traded corporations and found large disparities between CEO and average worker pay. In particular, it concluded that the fast food industry is particularly egregious in this regard, with a CEO-to-average worker pay ratio of over 1 ,000-to-1  in 2013. In addition to the human costs, the report notes evidence to suggest that high levels of pay disparity undermine firm performance due to labor unrest, lower levels of customer satisfaction, and exposure to other costs associated with  extreme disparity. The report concludes that corporate shareholders need better information on pay disparity in order to assess the relative risk of competing investment options.


Urging the SEC to move forward without delay to finalize the pay ratio regulations, Senator Menendez said the findings in the report provide new impetus for the regulations. Currently, investors have access to data on CEO pay, he observed, but until the pay ratio rules are finalized, investors will have only imprecise data to assess the other half of the pay disparity equation, the typical pay of workers in the firms they own. This is information that investors need and have a right to know, he emphasized. 

Saturday, May 24, 2014

House Hearing Calls into Stark Relief Role of Financial Stability Board in FSOC SIFI Designation Process

At a hearing on the process that the Financial Stability Oversight Council (FSOC) uses to designate systemically important financial institutions (SIFIs), and against the backdrop of growing concern over the influence of the Financial Stability Board on FSOC SIFI designations, House Financial Services Committee Chair Jeb Hensarling (R-TX) said that FSOC should cease and desist making new SIFI designations until Congress comes to an understanding of how the designation   process works. He added that empowering FSOC to impose bank-like standards on non-bank financial firms has expanded the Fed’s remit throughout the  financial system.

With regard to the designation of asset management firms as SIFIs, Chairman Hensarling found it almost inconceivable that the failure of an asset manager could cause systemic risk since they manage other people’s money. The oversight Chair is also concerned that FSOC seems to taking its direction on SIFI designations from a secretive international body, the Financial Stability Board. The Chair is concerned that FSOC is following the lead of the Financial Stability Board in designating SIFIs.  He noted that neither the Fed nor the SEC has ever reported to Congress on its participation in the FSB, nor has Congress authorized such participation. This amounts to a shadow regulatory process, he averred.

Earlier, Chairman Hensarling, in a letter also signed by his five subcommittee Chairs, asked Treasury, Fed Chair Janet Yellen and SEC Chair Mary Jo White to explain to Congress the process FSOC uses to designate SIFIs and the role played by the Financial Stability Board, which has proposed methodologies for designating non-bank global SIFIs. 

The House Chairs are troubled that sweeping power in this area has been invested in the FSB, which is an unincorporated Swiss association with no authority under U.S. law or treaty. In their view, the FSB’s semi-official status as an offshoot of the G-20 makes it an inappropriate forum for decisions of this importance. Noting that the FSB is a complete black box, the House Chairs do not believe U.S. sovereignty should be surrendered on financial regulation to what the call an ``international old boy’s club’’ that deliberates in secret. 

At a recent FSOC conference on asset management firms, Mary Miller,  Treasury Under Secretary for Domestic Finance, while noting that the FSB and the Council have a shared objective of promoting financial stability, emphasized that the domestic and international processes are entirely independent. In its work, the Council adheres to the standard and considerations for designations that are listed in the Dodd-Frank Act and in the Council’s public guidance. She assured that FSOC is the only authority that can designate an entity for Federal Reserve Board supervision and enhanced prudential standards. Her remarks take on heightened importance in light of the recent letter from Chair Hensarling to Treasury and the Fed and SEC Chairs questioning the role of the FSB in the FSOC SIFI designation process. 

In his testimony before the Financial Services Committee, former Treasury official Michael Barr defended the FSB noting that global coordination is essential to making the financial system safe for the United States, as well as for the global economy. The United States has led the way on global reforms, including robust capital rules, regulation of derivatives, and effective resolution authorities. These global efforts, including designations by the FSB, are not binding on the United States. Rather, the FSOC, and U.S. regulators, make independent regulatory judgments about domestic implementation based on U.S. law. He also pointed out that the FSB has become more transparent over time, adopting notice and comment procedures, for example, but it could do more to put in the place the kind of protections that the FSOC has established domestically.

 There seemed to be a bi-partisan consensus on the Committee that FSOC is somewhat opaque and should have a more transparent designation process. Rep. Scott Garrett (R-NJ) said that public policy should not be made in  secret. Chairman Emeritus Spencer Bachus (R-AL) said that it is very important that the FSOC designation process be open and transparent. Rep. Stephen    Lynch (D-MA) urged FSOC to maximize transparency in its processes.

Rep. Randy N eugebauer (R-TX) said that FSOC’s SIFI designation process for non-bank financial firms is fatally flawed. He described it as a highly speculative process that uses worst case scenarios.

Rep. Carolyn Maloney (D-NY) noted that non-bank firms need  to be subjected to stricter standards if they pose systemic risks. But she added that this power  must be exercised with great care, especially for asset managers that don’t operate like banks. Ultimately, it is a balancing act between a fair designation process and preserving the ability of FSOC to mitigate systemic risk.


House Panel Record Votes Reveal Strong Bi-Partisan Support for Expanding Capital Formation and Giving Relief to SBIC Investment Advisers

The House Financial Services has marked up and approved a number of pieces of securities legislation most of which are designed to enhance capital formation and some of which appear to have strong bi-partisan support. Rep. Jeb Hensarling (R-TX), the Chairman of the full Financial Services Committee, said that many of the bills are a follow up on the JOBS Act and are aimed at job creation. It is not a question of regulation or de-regulation, said Chairman Hensarling, it is a question of doing smart regulation. Initially, all of the measures were approved by voice vote, but the Committee conducted a recorded vote today. In a statement, Chairman Hensarling, noting the bi-partisan support garnered by many of these bill, urged the Senate to take them up and pass these regulatory relief measures.

SBIC Advisers Relief Act. One of the most strongly bi-partisan pieces of legislation approved by the Committee is the SBIC Advisers Relief Act, H.R. 4200, introduced by Rep. Blaine Luetkemeyer (R-MO), which would amend the Investment Advisers Act to reduce unnecessary regulatory costs and eliminate duplicative regulation of investment advisers to small business investment companies. The vote to approve was 56-0.

Specifically H.R. 4200 would allow advisers to venture capital funds to continue to be exempt reporting advisers if they also advise a small business investment company fund. The measure would also prevent the inclusion of the assets of a small business investment company fund in the SEC registration calculation of assets under management for those advisers that advise private funds in addition to small business investment company funds.

Currently, an adviser to a venture capital fund is exempt from SEC registration and an adviser to a small business investment company is exempt from registration. But, an adviser to both a venture capital fund and a small business investment company is not exempt. The legislation would exempt from SEC registration an investment adviser that advises both a venture capital fund and a small business investment company. H.R. 4200, which would fix an unintended consequence of the Dodd-Frank Act, has strong bi-partisan support. It is backed by Rep. Maxine Waters (D-CA), the Committee’s Ranking Member. A co-sponsor of H.R. 4200, Rep. Carolyn Maloney (D-NY), said that the measure restores the access of small businesses to broad investment advice and capital without compromising investor protection.

Disclosure Modernization and Simplification Act. Similarly, this measure, H.R. 4569, is a strongly bi-partisan measure that was approved by the Committee by a 59-0 vote. It would direct the SEC to permit issuers to submit, on Form 10-K annual reports, a summary page to make annual disclosures easier to understand for current and prospective investors. The measure was introduced by Rep. Scott Garrett (R-NJ), Chair of the Capital Markets Subcommittee, who noted that the summary page would have cross-references to the annual report to aid investors in navigating what can be lengthy annual reports. The bill would also direct the SEC, within 180 days of enactment, to tailor Regulation S-K’s disclosure rules as they apply to emerging growth companies and smaller issuers and to eliminate other duplicative, outdated, or unnecessary disclosure rules as they apply to these smaller issuers. H.R. 4569 would also direct the SEC to identify and implement additional reforms to Reg. S-K to  simplify and modernize SEC disclosure rules.
The Committee approved an amendment offered by Rep. Maloney that would require the SEC to consult with the Investor Advisory Committee when studying Regulation S-K.

Encouraging Employee Ownership Act. The Committee also approved the Encouraging Employee Ownership Act, H.R. 4571, by a vote of 36-23. Five Democrats on the Committee voted for the bill. Introduced by Rep. Randy Hultgren (R-Il), the measure would amend SEC Rule 701, originally adopted in 1988 under Section 3(b) of the Securities Act and last updated in 1998. Under current law, if an issuer sells, in the aggregate, more than $5 million of securities in any consecutive 12-month period, the issuer is required to provide additional disclosures to investors, such as risk factors, the plans under which offerings are made, and certain financial statements. The legislation would require the SEC to increase that threshold to $20 million. Rep. Hultgren noted that support for this effort to expand the utility of Rule 701 can be found in the SEC’s Government-Business Forum on Small Business Capital Formation Final Reports for 2001, 2004-2005 and 2013.

The legislation aims to encourage the idea of letting employees own a stake in company they are part of.. Ownership is a great incentive, noted the sponsor. Rule 701 mandates disclosure. The SEC arbitrarily set the threshold at $5 million, noted Rep. Hultgren.  It is costly         to prepare disclosures just so a company can offer stock to employees, noted Rep. Hultgren. The bill, in addition to raising the threshold from 5 to 20 years would also adjust it for inflation every five years

Small Business Freedom to Grow Act. This measure, H.R. 4568, introduced by Rep. Ann Wagner (R-MO), was also approved by the Committee on a bi-partisan vote of 32-26. H.R. 4568  would amend the SEC Form S-1 registration statement to allow a smaller reporting company to incorporate by reference any documents the company files with the SEC after the effective date of the Form S-1. The bill would also amend the SEC’s Form S-3 registration statement to allow a smaller reporting company with a class of common equity securities listed and registered on a national securities exchange to register a primary securities offering exceeding one-third of the company’s public float. Finally, the legislation would further amend the Form S-3 registration statement to allow a smaller reporting company without a class of common equity securities listed and registered on a national securities exchange to register a primary securities offering not exceeding one-third of the company’s public float.

Private Placement Improvement Act. This piece of legislation, H.R. 4570, was approved by the Committee on a partisan vote of 31-28. It is an effort to return the removal of the general solicitation in Rule 506 to the original intent of Congress when it passed the JOBS Act to eliminate the general solicitation requirement. In July 2013, the SEC implemented the JOBS Act by adopting a rule lifting the ban on general solicitation and advertising for certain private securities offerings under Rule 506 of Regulation D.  According to Chairman Garrett, who introduced H.R. 4570, in addition to lifting the ban on general solicitation and advertising, the SEC issued a separate rule proposal not called for by Congress that would impose a number of new regulatory requirements on small companies seeking to utilize amended Rule 506 to raise capital, including proposals to submit additional Form D filings to the SEC in advance and at the conclusion of an offering, and to file written general solicitation materials with the SEC. Under the SEC’s rule proposal, an issuer could also be disqualified by the SEC from using Rule 506 for one year based on a failure to comply with the Form D filing requirements.

Startup Capital Modernization Act. Similarly, the Committee approved the Startup Capital Modernization Act, H.R. 4565 by a partisan vote of 31-28. Iintroduced by Rep. Patrick McHenry (R-NC), Chair of the Oversight Subcommittee, which is designed to allow small businesses to better use regulation A. The bill builds on the JOBS Act, which raised Tier 1 Regulation A offerings to 50 million. H.R. 4565 would reform and improve Regulation A securities offerings by increasing the maximum amount of a single public offering under Tier 2 Regulation A from $5 million to $10 million. The measure would also clarify the preservation of state enforcement authority with respect to an issuer, intermediary, or any other person or entity using the exemption from registration under Regulation A. Under the bill, the SEC is directed to exempt securities acquired under Tier 1 and Tier 2 Regulation A offerings from Sec. 12(g) of the  Securities Exchange Act if the issuer provided potential investors with audited financial statements. The Securities Act would be amended to add the resale of any securities acquired in an exempted transaction to the list of exempted transactions as long as certain conditions are met.

Restricted Securities Relief Act. The Committee also approved the Restricted Securities Relief Act, H.R. 4554, by a partisan vote of 29 to 28. Introduced by Rep. Mick Mulvaney (R-SC), which would amend SEC Rule 144 to redu.ce from six months to three months the mandatory holding period before which restricted securities issued by an SEC reporting company may be resold to the public. H.R. 4554 would also amend Rule 144 to allow the public resale of restricted securities originally issued by a shell company starting two years after the date on which the company files a Form 8-K with the SEC disclosing that it is no longer a shell company. Finally, H.R. 4554 would amend Section 18(b) of the Securities Act to include in the definition of “covered securities” exempt from state regulation any security offered or sold in compliance with Rule 144A. Rep. Mulvaney noted that the provisions in the measure  reducing the holding period from six months to three months and providing for shell company relief are based on recommendations in the SEC’s Government-Business Forum on Small Business Capita Formation Final Report for 2012.

Rep. Mulvaney noted that it is appropriate to reduce the Rule 144 holding period in light of the need to increase liquidity and the increasing speed of information being disseminated into the markets. He also noted that Canada has made the change to a three-month holding period.
The Ranking Member opposes H.R. 4554, noting that the SEC reduced the holding period from two years to six months, which is proper. The bill would also encourage PIPE transactions.


Financial Regulatory Clarity Act. Finally, the Committee approved the Financial Regulatory Clarity Act, H.R. 4466, by a bi-partisan vote of 34-25. Co-sponsored by Rep. Shelley Moore Capito (R-WV), Chair of the Financial Institutions Subcommittee and Rep. Gregory Meeks (D-NY). The measure would require the SEC, CFTC, FDIC, OCC and the Fed to assess whether any newly proposed regulation or order conflicts with, duplicates or is inconsistent with existing federal regulations, and address any overlap or duplication before issuing the final rulemaking. The bill would also require the SEC, CFTC and the other regulators to evaluate whether existing regulations are outdated, and to submit a report to Congress making recommendations for repealing or amending any conflicting, inconsistent, duplicative, or outdated laws or regulations within 60 days of a proposed rulemaking.

Monday, May 19, 2014

Senator Paul to Delay Confirmation of Fed Nominees Until Airing of Legislation Placing Fed Securities Purchases Under Congressional Oversight

In a letter to Senator Harry Reid (D-NV), Senator Rand Paul (R-KY) vowed to delay the conformation of three nominees to the Federal Reserve Board until floor action is taken on legislation to provide congressional oversight of the Fed in the central bank’s securities purchases and other areas. In the letter, Senator Paul formally objects to floor consideration of the pending nominations of Stanley Fischer (who is slated to be Vice Chair of the Fed), Treasury senior official Lael Brainard, and current Fed Governor Jerome Powell for a full term, without also considering legislation to bring much-needed transparency to the Fed.

The Senator requests that his bi-partisan Federal Reserve Transparency Act, S. 209, be scheduled for an up or down vote concurrently with nominees to the Fed. The measure would place the Fed's credit facilities, securities purchases, and quantitative easing activities under Congressional oversight. The bill would also eliminate all restrictions placed on Government Accountability Office (GAO) audits of the Federal Reserve.

Senator Paul noted that similar legislation passed the House by a vote of 327-98, with bipartisan support, on July 25, 2012. This same bill has been stalled in the Senate for more than three years, he said.

Senator Chambliss Introduces Derivatives End-User Protection Bill

Senator Saxby Chambliss (R-GA) has introduced legislation designed to clarify for the CFTC how to best protect derivatives end-users that use futures markets to both purchase commodities, and use derivatives to hedge their risks. Although the Dodd-Frank Act specified that end-users should not be treated the same as banks and in many instances should not be subject to the same registration and margin requirements as other market participants, noted Senator Chambliss, the Ranking Member on the Ag Committee, the CFTC has not exempted true derivative end-users from the margin requirements applied by Dodd-Frank to many derivatives contracts. The End-User Protection Act would also fix many unintended consequences created by Dodd-Frank.

The legislation would clarify that non-financial end-users are exempt from the margin requirements applied by the Dodd-Frank Act to many derivatives contracts and also provide a new definition for a “financial entity” and further clarify the intent of Congress for how inter-affiliate trades should be treated.

The measure would also exempts persons that would not ordinarily have to maintain communications records with the CFTC and allow members of a registered entity that is not registered or required to be registered with the Commission in any capacity to maintain their own written records of each transaction in a commodity interest and any related cash or forward transactions.

The term “bona fide hedging” has multiple definitions in several rules that the CFTC has examined or is in the process of examining. The legislation would clarify the definition and make emphatic that Congress does not intend for the CFTC to move forward with an overly restrictive definition. 

Senate Banking Committee Marks Up and Approves Bi-Partisan Legislation Reforming Mortgage Finance and Securitization Markets

The Senate Banking Committee marked up, approved and favorably reported to the full Senate, by a bi-partisan vote of 13-9, the Housing Finance Reform and Taxpayer Protection Act of 2013, S. 1217, which represents a sweeping overhaul of the current mortgage finance and securitization system. The legislation would wind down and eliminate Fannie Mae and Freddie Mac and allow for a diverse set of private entities to step in and replace most of their functions. The new system establishes a type of mortgage-backed security with an explicit government backstop and 10 percent first-loss private secondary market capital to absorb losses and protect taxpayers from future bailouts.

The legislation would establish the Federal Mortgage Insurance Corporation (FMIC) as an independent federal agency to develop standard form credit risk-sharing mechanisms, products, and security agreements that require private market holders of a covered security insured under the Act to assume the first loss position with respect to losses incurred on such securities. To be eligible for FMIC reinsurance, any market structured mortgage-backed security must first secure private capital in a first loss position of at least 10 percent.

S. 1217 would also establish a Securitization Platform tol improve standardization and liquidity in the secondary mortgage market. It would create a standardized security to be used for all FMIC guaranteed securities in order to promote broad mortgage availability for 30-year, fixed-rate mortgages, and will be available for the issuance of private label securities. The Platform would also provide infrastructure for market participants of all sizes seeking to securitize mortgages, and will not assume or hold credit risk.

Banking Committee Chair Tim Johnson (D-SD) said that the legislation represents the final chapter of financial reform by addressing the most significant unresolved issue from the financial crisis, which is the housing finance and mortgage securitization system. Senator Johnson said that he and Senator Mike Crapo (R-ID), the Committee’s Ranking Member, will continue to build additional bi-partisan support for the legislation as it moves towards the Senate floor.

A Managers Amendment to S. 1217, offered by Chairman Johnson and Ranking Member Crapo, was approved by a voice vote. Among other things, the Amendment would clarify that, with respect to a covered security, the term issuer means an approved aggregator that issues such covered security through the platform. For a non-covered security, the term issuer will have the same meaning as under the Securities Act. Also, the platform will not be deemed to be an issuer of either covered or non-covered securities for purposes of the Securities Act.

Under the legislation, FMIC must, after consulting with the SEC, adopt rules requiring market participants to make available to private market investors in connection with the first loss position on a covered security documents relating to eligible mortgage loans collateralizing that covered security. The Managers Amendment would also require market participants to disclose to investors information that is substantially similar, to the extent practicable, to disclosures required of issuers of asset-backed securities under the Exchange Act until the covered security is paid in full. The exception is information that FMIC determines, in consultation with the SEC, is not applicable to a covered security. All disclosures must be made consistent with the antifraud provisions of the federal securities laws. 

The legislation would also provide insurance on any covered security for which any private market holders have assumed the first loss position with respect to losses and establish a Mortgage Insurance Fund. S. 1217 would authorize FMIC to provide insurance to any covered security regardless of whether it has satisfied credit-risk sharing requirements if unusual and exigent circumstances have created, or threatened to create, an anomalous lack of mortgage credit availability within the housing markets that could materially and severely disrupt the functioning of the housing finance system.

The measure would also amend the Securities Act and the Securities Exchange Act to exempt covered securities insured by FMIC from SEC regulation in general and from credit risk retention requirements in particular.

Friday, May 16, 2014

Fed Chair Yellen Tells Senate Panel That Asset Management Firms Can Be Designated as SIFIs

In testimony before the Senate Budget Committee, Fed Chair Janet Yellen affirmed that asset managers that are potentially a cause of systemic risk to the financial markets should be designated as systemically important financial institutions (SIFIs) and put under enhanced capital and liquidity standards. The Chair was responding to remarks by Senator Kelly Ayotte (R-NH), who noted that the Financial Stability Oversight Council should consider, when designating a SIFI, that asset management firms differ from banks.

With Congressional concern growing around how FSOC designates SIFIs, and an FSOC conference on asset management firms set for May 19, Chair Yellen agreed with Senator Ayotte that asset managers have different characteristics than banks. But she assured that FSOC does an extremely detailed analysis of a firm’s specific characteristics when considering SIFI designation. FSOC is trying to determine if stress on a firm could give rise to systemic risk. A number of different mechanisms are employed, said the Fed Chair, adding that there is no one size fits all. FSOC should clearly identify why a firm has been designated as systemically risky, emphasized the central bank chief. The Fed Chair is a member of FSOC, along with the SEC and CFTC Chairs, among others.

House Oversight Leaders Ask SEC and Fed Chairs to Explain Role of Financial Stability Board in FSOC Designation of SIFIs

House oversight leaders have asked the SEC and Fed Chairs to explain how the Financial Stability Oversight Council and the Financial Stability Board go about designating financial firms, particularly non-bank firms, as systemically important financial institutions (SIFIs) and global systemically important financial institutions (G-SIFIs). In a letter to SEC Chair Mary Jo White and Fed Chair Janet Yellen in their capacity as FSOC members, with a copy to Treasury as permanent FSOC Chair, Rep. Jeb Hensarling (R-TX), Chair of the Financial Services Committee, asked the Fed and SEC to respond by May 16, 2014 to a series of questions intended to allow Congress to understand the designation process. The letter was also signed by the Committee’s five Subcommittee Chairs: Rep. Scott Garrett (R-NJ), Capital Markets, Rep. Shelley Moore Capito R-WV), Financial Institutions, Rep. Randy Neugebauer (R-TX), Housing and Insurance, Rep. Patrick McHenry (R-NC), Oversight and Investigations, and Rep. John Campbell (R-CA), Monetary Policy and Trade.

The House Chairs are troubled that sweeping power in this area has been invested in the FSB, which is an unincorporated Swiss association with no authority under U.S. law or treaty. In their view, the FSB’s semi-official status as an offshoot of the G-20 makes it an inappropriate forum for decisions of this importance. Noting that the FSB is a complete black box, the House Chairs do not believe U.S. sovereignty should be surrendered on financial regulation to what the call an ``international old boy’s club’’ that deliberates in secret.

The letter requests information on how FSOC’s designation process relates to the Board’s process and seeks assurance that decisions on the systemic importance of U.S. firms is not being outsourced to the G20. FSOC and the FSB are also asked to provide specific metrics to support the designation of non-bank financial firms, which need a clear definition of systemic risk. More broadly, FSOC and FSB designations should always be supported by a full factual record and rigorous analysis. Full transparency must be the hallmark of the designation process.

FSOC is asked to clarify the capital standards applicable to designate insurers. The source of uncertainty is the Collins Amendment in the Dodd-Frank Act. Senator Susan Collins (R-ME), author of the amendment, has said that she never intended it to apply to insurance companies. The capital standards were intended for banks, noted the Chairs, but the Fed has interpreted the Collins Amendment to require the application of bank capital standards to designated insurers. Noting that it is universally recognized that banking risks are different than the risks associated with the insurance business, the House leaders said FSOC should halt any further designation of insurers until this regulatory gap is resolved and it is clarified that insurers will not be subject to bank capital standards.

The letter also states that the SEC Chair and Fed Chair and other voting members of FSOC and the FSB should offer to meet with firms being considered for SIFI or G-SIFI designations, especially non-bank firms whose operations and business models may be unfamiliar to FSOC members who regulate banks and may have no particular background or expertise in non-bank areas. The current restricting of dialogue to staff levels makes it unlikely that the unique issues of these firms will be adequately considered. Finally, the House leaders emphasized that the FSB must provide greater transparency on all of its activities. For example, Board meetings should be open to the public and to Congress, and memoranda and other records on designations should be made publicly available.

Tuesday, May 13, 2014

E.U. Court of Justice Rejects United Kingdom Challenge to Financial Transaction Tax

The E.U. Court of Justice has rejected a challenge brought by the United Kingdom against the decision authorizing eleven Member States to establish enhanced cooperation in the area of a financial transaction tax. The decision of the Court, while not a ruling on the substance of the tax, is an endorsement of the procedure being used by the eleven Member States to implement a financial transaction tax. In its ruling, the Court found that the arguments put forward by the United Kingdom were directed at elements of a potential FTT and not at the authorization by the E.U. Council to establish enhanced cooperation allowing a plurality of Member States to move forward to enact a financial transaction tax.

Now that 11 E.U. countries, including Germany, France, Spain and Italy, back the implementation of a financial transactions tax, the European Commission was able to move forward and make a concrete proposal for the European Parliament to consider. E.U. Tax Commissioner Algirda Semeta delivered a proposal for a financial transactions tax to the Economic and Financial Affairs Council (ECOFIN) in order to facilitate quick progress on this item. The Commissioner noted that, in addition to being a new source of revenue from a currently under-taxed sector, the financial transaction tax will encourage more responsible trading. Thus, aside from its revenue raising potential, a financial transactions tax could reduce harmful and speculative short-term and high speed trading and thereby link a trade more closely to the underlying fundamental economic market conditions and make financial markets less volatile.

Commissioner Semeta said that the proposal to ECOFIN is based on a Commission Directive proposed last year. The proposal recommends that a financial transaction tax be applied to all financial transactions, in particular those carried out on organized markets such as the trading of equity, bonds, derivatives, and currencies. The tax would be levied at a relatively low statutory rate and would apply each time the underlying asset was traded. The tax collection or the legal tax incidence should be, as far as possible, via the trading system which executes the transfer.

The proposed Directive defines a financial transaction as the purchase and sale of a financial instrument before netting and settlement, including repurchase and reverse repurchase and securities lending and borrowing agreements; the transfer between entities of a group of the right to dispose of a financial instrument as owner and any equivalent operation implying the transfer of the risk associated with the financial instrument; and the conclusion or modification of derivatives agreements.

The Court rejected the U.K. argument that the FTT should not go forward because it produces extraterritorial effects and read together with other Directives on mutual assistance and administrative cooperation in the area of tax, would impose costs on non-participating Member States. The Court said that the decision to allow enhanced cooperation contains no provision on the issue of expenditure linked to the implementation of enhanced cooperation. That issue can therefore not be examined before the formal introduction of the FTT. Irrespective of whether the concept of expenditure resulting from implementation of enhanced cooperation does or does not cover the costs of mutual assistance and administrative cooperation referred to by the United Kingdom in its plea, reasoned the Court, it is obvious that the question of the possible effects of the future FTT on the administrative costs of non-participating Member States such as the U.K. cannot be examined so long as the principles of taxation in respect of that tax have not been definitively established as part of the implementation of the authorized enhanced cooperation.

E.U. Will Implement Financial Transaction Tax by January 2016

The European Union will implement a financial transaction tax by January 1, 2016, announced the E.U. Economic and Financial Affairs Council (ECOFIN), a delay from earlier target dates anticipated by the European Commission. But, said E.U. Tax Commissioner Algirdas Semeta, while it is true that the plan and pace are less ambitious than the Commission had proposed, every step forward on the financial transaction tax is of significance. The E.U. financial transaction tax will be the first regional financial transaction tax in the world. It has three core objectives. First, it will strengthen the Single Market by avoiding a patchwork of national taxes, he added, and, second, it will ensure that the financial sector makes a fairer contribution to public finances. Third, will support regulatory measures in encouraging the financial sector to engage in more responsible activities, geared towards the real economy. Since enhanced cooperation to effect the tax was launched by eleven E.U. Member States, there have been a number of technical working groups to discuss the proposal, involving all 28 Member States, as well as meetings between just the 11 Member States involved.

In a joint statement, the Ministers of E.U. member states participating in enhanced cooperation to do a financial transaction tax said that they will create a harmonized taxation regime to tax financial transactions. The Council Working Group has reviewed the European Commission’s proposal during the past months and concluded that the complex issues involved engender the need for more work on the proposal. The eleven Member States who will implement the tax, including Germany, France and Italy, said that they are willing to participate in this ongoing process with all E.U. Member States, an are determined to finalize viable solutions by the end of the year that will also take into account the concerns voiced by non-participating Member States.

The Member States envision a harmonized financial transaction tax based on a progressive implementation, which will first focus on the taxation of shares and some, but not all, derivatives. This approach is essential to ensure that each step towards full implementation of the financial transaction tax is designed in a manner that takes due consideration of the economic impact.

Within that context, the first step should be implemented at the latest on January 1, 2016. If individual Member States would like to impose taxation for other products that are not included from the beginning of a progressive implementation, in order to maintain existing taxes, they would be allowed to do so.

House Panel Parks Up and Approves Legislation Expanding Capital Formation and Giving Relief to SBIC Investment Advisers

The House Financial Services has marked up and approved a number of pieces of securities legislation most of which are designed to enhance capital formation and some of which appear to have strong bi-partisan support. Rep. Jeb Hensarling (R-TX), the Chairman of the full Financial Services Committee, said that many of the bills are a follow up on the JOBS Act and are aimed at job creation. It is not a question of regulation or de-regulation, said Chairman Hensarling, it is a question of doing smart regulation. All of the measures were approved by voice vo te. However, a recorded vote was requested on every bill and such was ordered by Chairman Hensarling. It was unclear when the recorded votes will be conducted.

SBIC Advisers Relief Act. One of the most strongly bi-partisan pieces of legislation approved by the Committee is the SBIC Advisers Relief Act, H.R. 4200, introduced by Rep. Blaine Luetkemeyer (R-MO), which would amend the Investment Advisers Act to reduce unnecessary regulatory costs and eliminate duplicative regulation of investment advisers to small business investment companies. Specifically H.R. 4200 would allow advisers to venture capital funds to continue to be exempt reporting advisers if they also advise a small business investment company fund. The measure would also prevent the inclusion of the assets of a small business investment company fund in the SEC registration calculation of assets under management for those advisers that advise private funds in addition to small business investment company funds.

Currently, an adviser to a venture capital fund is exempt from SEC registration and an adviser to a small business investment company is exempt from registration. But, an adviser to both a venture capital fund and a small business investment company is not exempt. The legislation would exempt from SEC registration an investment adviser that advises both a venture capital fund and a small business investment company. H.R. 4200, which would fix an unintended consequence of the Dodd-Frank Act, has strong bi-partisan support. It is backed by Rep. Maxine Waters (D-CA), the Committee’s Ranking Member. A co-sponsor of H.R. 4200, Rep. Carolyn Maloney (D-NY), said that the measure restores the access of small businesses to broad investment advice and capital without compromising investor protection.

Restricted Securities Relief Act. The Committee also approved the Restricted Securities Relief Act, H.R. 4554, introduced by Rep. Mick Mulvaney (R-SC), which would amend SEC Rule 144 to reduce from six months to three months the mandatory holding period before which restricted securities issued by an SEC reporting company may be resold to the public. H.R. 4554 would also amend Rule 144 to allow the public resale of restricted securities originally issued by a shell company starting two years after the date on which the company files a Form 8-K with the SEC disclosing that it is no longer a shell company. Finally, H.R. 4554 would amend Section 18(b) of the Securities Act to include in the definition of “covered securities” exempt from state regulation any security offered or sold in compliance with Rule 144A. Rep. Mulvaney noted that the provisions in the measure reducing the holding period from six months to three months and providing for shell company relief are based on recommendations in the SEC’s Government-Business Forum on Small Business Capita Formation Final Report for 2012.

Rep. Mulvaney noted that it is appropriate to reduce the Rule 144 holding period in light of the need to increase liquidity and the increasing speed of information being disseminated into the markets. He also noted that Canada has made the change to a three-month holding period.

The Ranking Member opposes H.R. 4554, noting that the SEC reduced the holding period from two years to six months, which is proper. The bill would also encourage PIPE transactions.

Small Business Freedom to Grow Act. This measure, H.R. 4568, introduced by Rep. Ann Wagner (R-MO), was also approved by the Committee. H.R. 4568 would amend the SEC Form S-1 registration statement to allow a smaller reporting company to incorporate by reference any documents the company files with the SEC after the effective date of the Form S-1. The bill would also amend the SEC’s Form S-3 registration statement to allow a smaller reporting company with a class of common equity securities listed and registered on a national securities exchange to register a primary securities offering exceeding one-third of the company’s public float. Finally, the legislation would further amend the Form S-3 registration statement to allow a smaller reporting company without a class of common equity securities listed and registered on a national securities exchange to register a primary securities offering not exceeding one-third of the company’s public float.

Encouraging Employee Ownership Act. The Committee also approved the Encouraging Employee Ownership Act, H.R. 4571, introduced by Rep. Randy Hultgren (R-Il), which would amend SEC Rule 701, originally adopted in 1988 under Section 3(b) of the Securities Act and last updated in 1998. Under current law, if an issuer sells, in the aggregate, more than $5 million of securities in any consecutive 12-month period, the issuer is required to provide additional disclosures to investors, such as risk factors, the plans under which offerings are made, and certain financial statements. The legislation would require the SEC to increase that threshold to $20 million. Rep. Hultgren noted that support for this effort to expand the utility of Rule 701 can be found in the SEC’s Government-Business Forum on Small Business Capital Formation Final Reports for 2001, 2004-2005 and 2013.

The legislation aims to encourage the idea of letting employees own a stake in company they are part of.. Ownership is a great incentive, noted the sponsor. Rule 701 mandates disclosure. The SEC arbitrarily set the threshold at $5 million, noted Rep. Hultgren. It is costly to prepare disclosures just so a company can offer stock to employees, noted Rep. Hultgren. The bill, in addition to raising the threshold from 5 to 20 years would also adjust it for inflation every five years.

Disclosure Modernization and Simplification Act. This measure, H.R. 4569, is a strongly bi-partisan measure that was approved by the Committee and would direct the SEC to permit issuers to submit, on Form 10-K annual reports, a summary page to make annual disclosures easier to understand for current and prospective investors. The measure was introduced by Rep. Scott Garrett (R-NJ), Chair of the Capital Markets Subcommittee, who noted that the summary page would have cross-references to the annual report to aid investors in navigating what can be lengthy annual reports. The bill would also direct the SEC, within 180 days of enactment, to tailor Regulation S-K’s disclosure rules as they apply to emerging growth companies and smaller issuers and to eliminate other duplicative, outdated, or unnecessary disclosure rules as they apply to these smaller issuers. H.R. 4569 would also direct the SEC to identify and implement additional reforms to Reg. S-K to simplify and modernize SEC disclosure rules.

The Committee approved an amendment offered by Rep. Maloney that would require the SEC to consult with the Investor Advisory Committee when studying Regulation S-K.

Private Placement Improvement Act. This piece of legislation, H.R. 4570, approved by the Committee, is an effort to return the removal of the general solicitation in Rule 506 to the original intent of Congress when it passed the JOBS Act to eliminate the general solicitation requirement. In July 2013, the SEC implemented the JOBS Act by adopting a rule lifting the ban on general solicitation and advertising for certain private securities offerings under Rule 506 of Regulation D. According to Chairman Garrett, who introduced H.R. 4570, in addition to lifting the ban on general solicitation and advertising, the SEC issued a separate rule proposal not called for by Congress that would impose a number of new regulatory requirements on small companies seeking to utilize amended Rule 506 to raise capital, including proposals to submit additional

Form D filings to the SEC in advance and at the conclusion of an offering, and to file written general solicitation materials with the SEC. Under the SEC’s rule proposal, an issuer could also be disqualified by the SEC from using Rule 506 for one year based on a failure to comply with the Form D filing requirements.

The comment period on these proposals closed on September 23, 2013. The SEC has received more than 200 comment letters, noted Chairman Garrett, but has not yet taken further action on the rule proposal. He noted that the Private Placement Improvement Act is designed to ensure that the amended Regulation D is consistent with the goals of Title II of the JOBS Act, and to ensure that small businesses do not face complicated and unnecessary regulatory burdens when attempting to raise capital through private securities offerings under Rule 506, while at the same time preserving important investor protections. He emphasized that the legislation would not remove the Form D filing requirement or imperil investor protection.

More broadly, he observed that the SEC cannot alter a clear mandate from Congress in a way that would make Regulation D less attractive. Echoing this theme, Chairman Hensarling said that in the JOBS Act Congress spoke in a bi-partisan manner and that regulators should not overtly reverse the clear intent of Congress. Congress should not outsource its job to the SEC or other regulators, he emphasized. Rep. Robert Hurt (R-VA), speaking in support of the bill, advised the SEC to stay in its own lane.

Startup Capital Modernization Act. The Committee approved the Startup Capital Modernization Act, H.R. 4565, introduced by Rep. Patrick McHenry (R-NC), Chair of the Oversight Subcommittee, which is designed to allow small businesses to better use regulation A. The bill builds on the JOBS Act, which raised Tier 1 Regulation A offerings to 50 million. H.R. 4565 would reform and improve Regulation A securities offerings by increasing the maximum amount of a single public offering under Tier 2 Regulation A from $5 million to $10 million. The measure would also clarify the preservation of state enforcement authority with respect to an issuer, intermediary, or any other person or entity using the exemption from registration under Regulation A. Under the bill, the SEC is directed to exempt securities acquired under Tier 1 and Tier 2 Regulation A offerings from Sec. 12(g) of the Securities Exchange Act if the issuer provided potential investors with audited financial statements. The Securities Act would be amended to add the resale of any securities acquired in an exempted transaction to the list of exempted transactions as long as certain conditions are met.

Financial Regulatory Clarity Act. Finally, the Committee approved the Financial Regulatory Clarity Act, H.R. 4466, co-sponsored by Rep. Shelley Moore Capito (R-WV), Chair of the Financial Institutions Subcommittee and Rep. Gregory Meeks (D-NY). The measure would require the SEC, CFTC, FDIC, OCC and the Fed to assess whether any newly proposed regulation or order conflicts with, duplicates or is inconsistent with existing federal regulations, and address any overlap or duplication before issuing the final rulemaking. The bill would also require the SEC, CFTC and the other regulators to evaluate whether existing regulations are outdated, and to submit a report to Congress making recommendations for repealing or amending any conflicting, inconsistent, duplicative, or outdated laws or regulations within 60 days of a proposed rulemaking.

ExxonMobil and Shell urge SEC to quickly rework Dodd-Frank resource extraction rules in light of impending E.U. regulations

With the E..U. having enacted legislation mandatory disclosure of resource extractions payments to governments, and impending fast-track implementation by the U.K., two global energy companies have urged the SEC to commit to rework Dodd-Frank resource extraction regulations struck down last year by a federal judge. In a letter to SEC Chair Mary Jo White, the Controller of ExxonMobil and the CFO of Royal Dutch Shell emphasized that the public interest of achieving a coordinated and harmonized global transparency regime for resource extraction paymemts, which will best serve the interests of all stakeholders.
The EU Accounting & Transparency Directives must be implemented by legislation adopted individually in each EU Member State.  The U.K. is moving quickly on implementation, having already issued draft legislation for public comment with a current goal of meeting the October 2014 window for final adoption.

The energy companies  understand that the U.K. government would like to know the probable direction of SEC rulemaking under Section 1504, the resource extraction provision of Sarbanes-Oxley. If the SEC were able to indicate their willingness to consider the proposed new rules under Section 1504 before the U.K. legislation is finalized, they noted, the U.K. government could take the SEC approach into account in implementing its own transparency legislation. Since the U.K. will be the first E.U. Member State to implement the EU Accounting & Transparency Directives, thus setting a precedent for other E.U. Member States’ implementation. This is especially important for purposes of equivalency between the E.U. and U.S. reporting regimes.

Equivalency, they believe, is critical as the EU member states move to implement the transparency reporting directives. No one benefits from an outcome under which multinational resource companies are required to file multiple reports in multiple jurisdictions providing substantially the same information in different forms. On the other hand, we believe all stakeholders would benefit from seeing the direction of SEC rulemaking under 1504 as transparency reporting is implemented around the world. An ideal solution to the issue might be that compliance with the reporting rules in one country would be deemed to satisfy the reporting requirements in another country notwithstanding variations in detail.


The energy companies recognize that it would be impractical to expect regulatory action from the SEC in time to influence the U.K. on the current U.K. timetable. However, they believe that if the SEC were to take concrete steps to indicate it will take up Section 1504 rulemaking this year, the U.K. government might be willing to defer implementation of its transparency legislation from the October 2014 schedule to the April 2015 timeframe. This would provide sufficient time for the SEC to discuss with the U.K. implementing authority (Department for Business, Innovation & Skills) how best to take into account the SEC rules before any EU Member State finalizes its transparency legislation. 

Tuesday, May 06, 2014

House Passes Bi-Partisan Legislation to Exclude Legacy CLO Debt Securities from Volcker Rule

The House  passed legislation clarifying that nothing in the Volcker Rule should be construed to require the divestiture, prior to July 21, 2017, of any debt securities of collateralized loan obligations (CLOs), if such debt securities were issued before January 31, 2014. The vote to pass was 4xx to. Introduced by Rep. Andy Barr (R-Ky.), the Restoring Proven Financing for American Employers Act, H.R. 4167, would amend the Volcker Rule to exclude certain debt securities of CLOs from the prohibition against acquiring or retaining an ownership interest in a hedge fund or private equity fund. The Senate companion bill is S. 1907.

Representative Barr, a key member of the House Financial Services Committee, said that the legacy debt securities of CLOs must be protected from the medicine that the Volcker Rule prescribes. In his view, this medicine would be far more damaging to the credit markets than the perceived illness of suffering losses from CLO paper. Congress must grandfather existing CLO investments, emphasized Rep. Barr.

The legislation would also clarify that a financial institution would not be considered to have an ownership interest in a CLO if there is no indicia of ownership other than the right of the firm to fire or remove for cause, or to participate in the selection or removal of, a general partner, managing member, member of the board of directors, investment manager, investment adviser, or commodity trading advisor of the fund, provided that the CLO is predominantly backed by loans.

H.R. 4167 provides that an investment manager or investment adviser must be deemed to be removed for cause if the investment manager or adviser is removed as a result of a breach of a material term of the management or advisory agreement or the agreement governing the CLO; the inability of the investment manager or adviser to continue to perform its contractual obligations or any other action or inaction by the investment manager or investment adviser that has or could reasonably be expected to have a materially adverse effect on the CLO, if the manager or adviser fails to cure or take reasonable steps to cure such effect within a reasonable time.

An amendment offered by Rep. Carolyn Maloney (D-N.Y.) during the mark up of H,R. 4167, and approved by voice vote, added, as a removal for cause, a removal for a comparable event that threatens or could reasonably be expected to threaten the interests of the holders of the debt securities.

In remarks on the House floor, Rep. Murphy noted that the legislation represents a truly bipartisan compromise that balances the goal of preserving a proven financing mechanism with concerns against watering down the Volcker Rule. The truth is, said Rep. Murphy, the Volcker Rule is not intended to capture debt. Debt is an everyday tool of plain vanilla financial institutions. The Volcker Rule is about equity ownership. Congress does not want banks owning hedge funds and private equity funds, but still wants lending. The legislation would provide narrow relief to existing CLO securities as long as they qualify as debt under the bill. For CLOs that are not debt securities under the bill, banks will get an additional two years to divest, which will prevent a disruptive fire sale of these securities. 

Rep. Patrick Murphy (D-FL)) added that the legislation also clarifies that the right to vote to remove a CLO manager in traditional, creditor-protective circumstances, such as a material breach of contract, does not, by itself, convert a debt security into an equity security under the Volcker Rule. (Cong. Record, Apr 29, 2014, pH3258).

Senate Legislation Would Regulate Data Brokers to Protect Consumers

Senate Commerce Committee Chair John D. (Jay) Rockefeller IV (D-WV) and Senator Edward Markey (D-MA)  have introduced legislation that would require data brokers to be accountable and transparent about the information they collect and sell about consumers. This is an effort to regulate what Chairman Rockefeller called a booming shadow industry that generated more than $150 billion in 2012 and operates with very little scrutiny and oversight, and that is totally unfair to consumers.

The Data Broker Accountability and Transparency Act would  give consumers important protections like the ability to access files a data broker compiles of their personal information; the ability to correct inaccuracies in those files; and, importantly, choose whether they want to allow their personal information to be sold to other companies. The legislation would also give consumers the right to access their personal data, the ability to correct it, and opt-out from marketing purposes.        

The bill also would prohibit data brokers from collecting or soliciting consumer information in deceptive ways, and it would allow consumers to access and correct their information to help ensure maximum possible accuracy. Under the DATA Act, consumers would also be able to opt out of having their information collected and sold by data brokers for marketing purposes.

Senator Donnelly urges SEC and Fed to Protect Collateralized Loan Obligations in final Risk Retention Regulations

Senator Joe Donnelly (D-IN) fears the potential negative effects of the proposed regulations implementing the Dodd-Frank credit risk retention provisions on  open-market collateralized loan obligations (CLOs), which he described as an important source of financing to U.S. businesses. He noted that CLOs finance about $300 billion in loans, and such financing supports the expansion of businesses, the employment of more workers, and greater economic growth.

In a letter to SEC Chair Mary Jo White and Fed Chair Janet Yellen, Senator Donnelly acknowledged  that in their August 2013 re-proposal the regulators sought improvements over the original April 2011 proposal to avoid significant disruption to the CLO market. The re-proposed regulations acknowledge that  the agencies' goal in proposing this alternative risk retention option is to avoid having the general risk retention requirements create unnecessary barriers to potential open-market CLO managers sponsoring CLO securitizations. However, despite this language, the Senator said that the regulations  will still unnecessarily restrict the market and result in fewer CLO issuances and less competition. When issuing the final risk retention  regulations, he asked the SEC and bank regulators to carefully consider these concerns.

He added that he supports efforts on risk retention to ensure that complex financial products do not pose grave risks to the greater economy. But in the process of minimizing broader risk, he noted, regulators must strike a balance and do so in a way that does not threaten CLOs, which he views as a vital source of financing. He urged the regulators to ensure that the final regulations do not risk harming the CLO market's ability to fund the business lending that is important to the nation.

 

Senator Hagan asks SEC and Fed not to Prohibit Active Management of Loan Syndications in Risk Retention Regulations

Senator Kay Hagan (D-NC) requested the SEC and the Fed not to impose a prohibition on actively managing exposure in loan syndications in the final regulations implementing the credit risk retention provisions of the Dodd-Frank Act. In a letter to SEC Chair Mary Jo White and Fed Chair Janet Yellen, Senator Hagan said that such a prohibition would run counter to safe and sound banking practSeices and is at cross-purposes with prudential regulation. Loan syndications are a traditional product that banks use to provide capital to corporations, she noted, while managing their exposure to credit risk. The loans they syndicate are held by a large array of institutional investors, including mutual funds, insurance companies, as well as collateralized loan obligations (CLOs) and are not subject to risk retention under Section 941 of Dodd-Frank, posited the Senator.
Risk retention regulations. Senator Hagan, who is a key member of the Banking Committee, is concerned that the risk retention requirements regarding CLOs, if finalized in their present form, would eliminate the incentive to arrange or manage a CLO, and would significantly damage this important source of financing for American businesses. Many companies that rely on CLOs for financing could be forced to set aside plans for business expansion. The re-proposed regulations retain the original proposal, which would require CLO managers to satisfy the minimum risk retention requirement for each CLO securitization transaction that they manage, despite the fact that CLO managers do not originate the underlying assets and have limited balance sheets with which to retain a 5 percent share of the CLO.
Recognizing the shortcomings of the original proposal, the re-proposal introduces a new option that is intended to avoid significant disruption to the CLO market. Under this re- proposal, arrangers of a loan syndication that includes a "CLO-eligible" tranche would be required to hold a 5 percent share of that tranche until the loan is repaid, matures or defaults, and would be prohibited from selling or hedging such exposure.

European Commission issues Report on Feasibility of Smaller Credit Rating Agencies

In a report to the E.U. Parliament, the European Commission examined the feasibility of establishing a network of smaller credit rating agencies throughout the E.U. The report assesses how the establishment of such a network could contribute to the strengthening of smaller credit rating agencies, facilitating their growth to become more competitive market players. A number of distinctly smaller credit rating agencies have emerged in Europe after the enactment of the CRA Regulation. These smaller rating agencies  operate with a clear focus on specific industry sectors, financial market segments, or specific geographical area, thus responding to specialized market needs. The Regulation on credit rating agencies requires them to be registered and supervised by the European Securities and Markets Authority (ESMA). The legislation also subjects them to stringent independence rules as a precondition for the provision of rating services.

The Commission believes that an integrated network of smaller rating agencies would have a wider scope and deeper level of cooperation. The Commission has assessed, with contributions from representatives of smaller CRAs, a number of possible areas which could be covered. As a result, the following issues have been identified by this assessment as areas where an integrated network could potentially have an added value: the development of a common data platform for underlying information used for developing ratings, the design and use of common methodologies, and the sharing of expert knowledge and best practices on a wide range of topics such as internal controls.
 
One of the problems with an integrated network is that it could lead to increased anti-competitive
behavior contrary to the European Union's objectives to enhance diversity in the rating industry.
 
The creation of a cooperation network was assessed as an alternative to the integrated network. It would be a forum for smaller CRAs, which would enable the establishment of a structure for ular exchange and cooperation among smaller rating agencies.