August 25, 2016

Rules In Focus: DOL Filing Asks Court to Uphold Its New Fiduciary Regulation

The Department of Labor (“DoL”) filed, on August 19, a motion in the U.S. District Court for the Northern District of Texas opposing FSR and other plaintiffs’ (Plaintiffs) motions for summary judgment in Plaintiffs’ legal challenge to DoL’s new definition of investment-advice fiduciary and its subsequent rulemaking (“fiduciary regulation”). DoL also filed a cross-motion seeking summary judgment in its favor on all of Plaintiffs’ claims.

Rules In Focus: DOL Filing Asks Court to Uphold Its New Fiduciary Regulation
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Rules In Focus

Rules in Focus is FSR’s regulatory newsletter featuring the latest insights from the Fed, CFPB, SEC and other major regulators that oversee the financial services industry and the implementation of the Dodd Frank law.

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DOL Filing Asks Court to Uphold Its New Fiduciary Regulation

The Department of Labor (“DoL”) filed, on August 19, a motion in the U.S. District Court for the Northern District of Texas opposing FSR and other plaintiffs’ (Plaintiffs) motions for summary judgment in Plaintiffs’ legal challenge to DoL’s new definition of investment-advice fiduciary and its subsequent rulemaking (“fiduciary regulation”). DoL also filed a cross-motion seeking summary judgment in its favor on all of Plaintiffs’ claims.

In the brief in support of its motions, DoL argues that its new definition of a person who “renders investment advice” better aligns with the text and purposes of the Employee Retirement Income Security Act (ERISA) in light of significant changes in retirement savings and the market for retirement investment advice since DoL adopted the original definition of investment-advice fiduciary in 1975.

The brief notes that because Congress established a functional test for determining fiduciary status under ERISA, DoL’s authority to promulgate the fiduciary regulation is based on ERISA rather than the common law of trusts or securities laws. The brief also notes that the fiduciary regulation does not prohibit widely accepted methods of compensation, because the regulation includes new exemptions that allow the industry “to continue to receive common forms of compensation that would otherwise be prohibited [by law], subject to appropriate safeguards.”

The brief notes that rather than establishing entirely new standards of conduct, DoL is subjecting those who qualify as fiduciaries to the same responsibilities and restrictions that have been included in ERISA since it was passed in 1974. With respect to the fiduciary regulation erasing “distinctions between salespeople and fiduciary advisers,” the brief argues that “a bright-line distinction does not exist,” and “retirement investors are relying on investment advice from those who convey they have investors’ best interests in mind but nevertheless find ways to disclaim any obligation to act in investors’ best interests.”

While the changes required under the rulemaking will impose costs on those providing investment advice, the brief notes DoL determined “those transitional costs will be significantly outweighed by enormous benefits to retirement investors.” The brief stated that “Congress delegated to DoL the authority to determine how best to protect Americans’ retirement security,” and DoL “conducted a thorough analysis and provided a reasoned explanation for its conclusions as to how best to do so.” The brief concludes that “DoL’s determination is entitled to deference, and Defendants are entitled to summary judgment on all Plaintiffs claims.”

For more information, please contact Felicia Smith,

FSR Sends Comment Letters to CFPB on Arbitration Rules

On August 22, FSR as well as the American Bankers Association and Consumer Bankers Association sent a comment letter to the Consumer Financial Protection Bureau (“CFPB”) regarding the CFPB’s proposed rule regulating consumer arbitration agreements in financial services contracts. The letter expressed FSR’s concerns that the proposed rule should not be made final because it is not in the public interest, fails to protect consumers, and is not consistent with the CFPB’s March 2015 empirical study of consumer arbitration.

The letter argues that the proposed rule is not in the public interest because it would inflict serious financial harm on federal and state court systems, consumers, as well as financial services providers. The continuing costs of additional class action litigation that would be filed if the proposed rule becomes final are unprecedented and staggering, adding up to an estimated $2.62 billion to $5.23 billion every five years.

The letter also contends that the proposed rule should not be made final because it is not needed for the protection of consumers. The letter points out that the CFPB concluded that there is nothing about arbitration as a process that is harmful to consumers or to society as a whole, and that the proposed rule allows providers to arbitrate individual disputes with consumers. The letter also points out that the CFPB’s own data contradicts its conclusion that arbitration agreements with class action waivers harm consumers because they block class action claims. The letter also notes that the proposed rule threatens to have an adverse impact on consumers who have small-dollar “non-classable” claims because these consumers may now have to endure the inconvenience and costs of going to court.

The industry also strongly argues that the proposed rule should not be made final because it is not consistent with the CFPB’s own study on this topic. Elements of the CFPB’s study in advance of the proposed rule suggests that arbitration is faster, more economical, and far more beneficial to consumers than class action litigation and that the arbitration process is fair to consumers

Two noted arbitration scholars quoted in the letter recently concluded that the CFPB’s study “provides no foundation for imposing new restrictions or prohibitions on mandatory arbitration clauses in consumer contracts.” and that the study “fail[s] to support any conclusion that arbitration clauses in consumer credit contracts reduce consumer welfare or that encouraging more class action litigation would be beneficial to consumers and the economy.” They conclude by stating that “substantially more and different evidence would be necessary to conclude that consumers are harmed by arbitration or that they would benefit from unleashing class action litigation more routinely.”

FSR was also a signatory to another comment letter, which was sponsored by the U.S. Chamber of Commerce and signed by 28 other associations. The letter asked the CFPB to formally withdraw its proposal.

For more information, please contact Richard Foster,

Members of Congress Oppose Using G-SIB Surcharge in Annual Capital Planning Exercise

On August 15, two members of Congress, Randy Neugebauer and Robert Pittenger, wrote to the Board of Governors of the Federal Reserve System, expressing several concerns on the Board’s stated intention to subject U.S. global systemically important banks (“GSIBs”) to a capital surcharge in order to satisfy the post stress minimum capital requirements of the annual Comprehensive Capital Analysis and Review (CCAR) test.

Following the financial crisis, stress tests have become a resource to determine the adequacy of regulatory capital by showing if financial institutions can withstand adverse economic and financial scenarios. The process has been called the “cornerstone of a new approach to regulation,” by Federal Reserve Board Vice Chairman Stanley Fischer. A possible proposal for a separate capital surcharge, unique to the eight U.S. GSIBs, aims to reduce their probability of failure. The two Republican Congressmen, however, raise several objections not only concerning the imposition of the GSIB surcharge as a requirement in the CCAR test, but also to the proposed design and underlying purpose of such measure.

The Congressmen claim that the calculation of the GSIBs surcharge percentage lacks transparency and is arbitrary. For this reason, Neugebauer and Pittenger challenge the argument made by some leaders of the Federal Reserve that mandating a capital surcharge is necessary. If an additional requirement is imposed, the letter argues that the Board should do more to determine the additional amount of capital needed by an institution by identifying the nature of specific financial risks faced by G-SIBs.

Second, the letter states that the adoption of a capital surcharge would result in the duplication of already existing CCAR measures for G-SIB institutions, such as specialized tests that assume the failure of a major counterparty or that impose adverse market shock scenarios. In addition, the Board should balance the need for a capital surcharge and its design with other prudential measures. Indeed, the pre-stress test G-SIB surcharge capital requirement, Total Loss Absorbing Capacity (TLAC) requirements, and Single-Counterparty Credit Limits (“SCCL”) have the same underlying rationale and are designed to mitigate the exact same risks.

The last point of the letter addresses the presumed goal of the additional capital requirement. The Congressmen argue that the anticipated CCAR amendment will impose an additional “tax” on the eight largest U.S. banks, without further increasing the strength or efficiency of the U.S. banking system.

For more information, please contact Robert Hatch,

FSR/BITS to Submit Comments on Strengthening Cybersecurity

On August 10, the Commission on Enhancing National Cybersecurity, a subdivision of the National Institute of Standards and Technology, posted a notice requesting information about current and future state of cybersecurity in the digital economy. The notice is related to Executive Order 13718, released last February, which requests that the Commission make detailed recommendations to strengthen cybersecurity in both the public and private sectors.

The Executive Order also maintains that the Commission protect privacy, ensure public safety and economic and national security, foster the discovery and development of new technical solutions, and bolster partnerships between Federal, State and local government and the private sector in the development, promotion, and use of cybersecurity technologies, policies, and best practices. The Secretary of Commerce was tasked by the Executive Order to direct the Director of the National Institute of Standards and Technology to provide the Commission with such expertise, services, funds, facilities, staff, equipment, and other support services as may be necessary to carry out its mission.

The comment period is open until September 9, 2016. The request for information notes that steps must be taken to enhance existing efforts to increase the protection and resilience of the digital ecosystem, while maintaining a cyber environment that encourages efficiency, innovation, and economic prosperity. According to the Executive Order, the Commission’s recommendations should address actions that can be taken over the next decade to accomplish these goals.

To accomplish this mission, the Commission looks to reference and build on successful existing cybersecurity policies, public-private partnerships, and other initiatives. It also seeks to consult with cybersecurity, privacy, and technology experts in the public and private sectors and seek input from those who have experienced significant cybersecurity incidents to understand lessons learned from these experiences. The request for information seeks broad input from individuals, organizations of all sizes and their representatives, and from prviate sector and professional associations.

The Commission is seeking information and suggestions on several topics, including critical infrastructure cybersecurity, identity and access management, internet of things, and state and local government cybersecurity. For each topic area, the request for information solicits information on current and future challenges, promising and innovative approaches to address those challenges, recommendations, and references to inform the work of the Commission.

FSR will be contributing to a response to this request via its work with the Financial Services Sector Coordinating Council (FSSCC).

For more information, please contact Josh Magri,

Leaders of the House Ways and Means Committee Urge Covered Agreement with EU on Insurance Issues

On August 17, the leaders of the House Ways and Means Committee sent a bi-partisan letter to U.S. officials urging them to continue their efforts to negotiate a covered agreement on insurance issues with the European Union. The letters notes how recently adopted EU insurance regulations, also known as Solvency II, unfairly discriminate against U.S. based entities, especially in regards to reinsurance transactions. Although Solvency II recognizes the adequacy of U.S. based prudential rules for EU based firms that conduct business in the United States, similar treatment has not been extended to U.S. based firms that wish to rely on U.S. prudential standards when offering insurance products and services in Europe.

The letter was addressed to Treasury Secretary Jack Lew and U.S. Trade Representative Michael Froman and was signed by Kevin Brady (R-TX) and Sander Levin (D-MI) the Chairman and Ranking Member, respectively, of the House Ways and Means Committee. The Treasury Department and the Office of the United States Trade Representative (“USTR”) were given authority under the 2010 Dodd-Frank Act to negotiate covered agreements after consulting with Congress. The USTR and the Treasury department announced their intention to begin negotiating with their EU counterparts last November and have since held periodic discussions which included a meeting last month.

Although the recent letter from Chairman Brady and Ranking Member Levin applauded these ongoing efforts, they also stated their view that current EU rules may violate trade rules set forth by the WTO General Agreement. As such, if negotiating a covered agreement is not possible, the Congressmen urge Secretary Lew and Representative Froman to consider other avenues, including enforcement mechanisms, as a way of correcting what they see as an “unjustified trade barrier.”

For more information, please contact Robert Hatch,

CFTC Report on Swap Dealer de Minimis Exception Released with No Recommendations

On August 15, the CFTC released the swap dealer de minimis exception final staff report. The current regulation of the Commodity Futures Trading Commission (“CFTC”) provides that a person is not considered to be a swap dealer unless its swap dealing activity exceeds an aggregate gross notional amount threshold of $3 billion over the prior 12-month period, subject to a phase-in period, which is still in effect, during which the threshold was set at $8 billion. The phase-in period will terminate on December 31, 2017, unless the CFTC takes action prior to that date to set a different termination date or to modify the de minimis exception.

The final staff report supplements the swap dealer de minimis exception preliminary report that was released by the CFTC last November, and provides a summary of comments received and further data analysis. The final report took into account twenty-four comment letters responsive to the preliminary report. The preliminary report sought to analyze the available swap data, in conjunction with relevant policy considerations, to assess the current de minimis threshold and potential alternatives to the de minimis exception.

In addition to discussing the de minimis threshold level, the final report also noted the following issues for the CFTC’s future consideration. These were (i) assessing the appropriateness of excluding from the de minimis calculation swaps that are executed on a swap execution facility (“SEF”) or designated contract market (“DCM”) and/or cleared and (ii) reconsidering the parameters of the exclusion for swaps related to loans made by insured depository institutions (“IDI Exclusion”).

In addressing the focus of the comment letters and particularly noting the timing issues for market participants associated with changes to the de minimis exception, the final report recommended that the CFTC decide whether the de minimis threshold should be set at the current $8 billion level, be allowed to fall to $3 billion as scheduled, or to delay the reduction of the de minimis threshold while the CFTC continues its efforts to improve data quality so that it can better determine threshold level.

The report closes by questioning if the CFTC should consider, in the future, excluding swaps that are traded on a SEF or DCM and/or cleared from an entity’s de minimis calculation, and also by requesting that CFTC staff obtain further information to continue to assess the IDI exclusion to determine whether its conditions are overly restrictive.

For more information, please contact Robert Hatch,

Industry Makes Suggestions on Banking Agencies NSFR Proposal

On August 5, FSR, in conjunction with several other trade associations, sent a comment letter to the Federal Reserve (“Fed”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Agencies”) in response to their joint notice of proposed rulemaking regarding the net stable funding ratio (“NSFR”) requirement in the United States. In the letter, FSR and the other industry trades noted that in addition to the NSFR, several other regulatory rules and schemes have been implemented that could make the finalization of the NSFR obsolete. FSR also noted that should the agencies elect to go forward with the finalization of the NSFR, there were several substantive and procedural concerns with the proposal that should be addressed.

First, the letter notes that the proposed NSFR requirement appears to lack clear and coherent conceptual and analytical bases. The comment letter calls for the final design and calibration of any NSFR requirement to be established by reference to clear and coherent conceptual and analytical bases for each element of the proposed rule, which should then be disclosed publicly. FSR also noted that the proposal suffered from significant procedural shortcomings, most notably that it does not provide either analytical support or underlying data to support its various components. This could be remedied if the agencies release the analytical underpinnings and empirical support for the proposed rule and then reopen the comment period in order for interested parties to evaluate this material.

The comment letter also states that should the agencies ultimately adopt a NSFR regime in the United States, there are numerous specific aspects of the proposed rule that require revision in order to better align the proposal’s constructs with the underlying economic substance of different assets, liabilities, and related transactions addressed by the rule, to better reflect the reality of market dynamics in the United States, and to help mitigate some of the unwarranted costs and distortions that the proposed NSFR would otherwise foster. FSR and the other industry trades noted that the imposition of the NSFR harms the broader economy by reducing the supply of credit offered by banking organizations and by impairing market liquidity.

The letter also argues that the NSFR and the way it is currently calibrated does not account for the cumulative impact of other regulatory requirements. The letter recommends several amendments to the NSFR that would improve this calibration, including revisions to the proposal’s calculation of derivative amounts, a later implementation deadline than January 1, 2018 for effectiveness, and permission for covered companies to calculate their NSFR in the same manner as they calculate their regulatory capital requirement.

In addition, FSR notes that aspects of the proposed rule’s definitions and disclosure requirements should be amended, including the definition of “Liquid and Readily-Marketable”, the definitions of secured lending transactions and secured funding transactions, and a more limited form of quantitative disclosure of NSFR information that would provide covered companies with additional time to prepare for implementation of the proposed rule’s disclosure requirements.

For more information, please contact Robert Hatch,

Industry Seeks Clarity on Proposal to Impose New “Resolution Stay” Requirements on Derivatives Contracts

On August 5, FSR signed on to a comment letter to the Federal Reserve in regards to a notice of proposed rulemaking (“NPR”) relating to restrictions on the terms of qualified financial contracts (“QFCs”) entered into by U.S. banking organizations identified as global systemically important banking organizations (“GSIBs”) and the U.S. operations of foreign banking organizations (“FBOs”) that are GSIBs. FSR was joined by several other trade associations, led by The Clearing House Association, in expressing support for the NPR while also recommending several minor modifications to it that would further its purpose.

The letter contains three types of proposed changes: modifications to exclude certain specialized entities from the definition of covered entity; removing certain types of QFCs from the definition of covered QFC to the extent not necessary to support a rapid and orderly resolution; and clarifying changes to further the objectives of the NPR.

Specifically, the letter proposes that non-controlled entities and FBO subsidiaries not under U.S. intermediate holding companies (“IHCs”) be excluded from the definition of covered entity and that, as a result, QFCs with these entities would not be subject to the requirements in the NPR. The letter also lists eight types of QFCs that should be excluded from the definition of covered QFC under the final rule.

The comment letter also maintains that the final rule should clarify that covered QFCs exclude not only “cleared” derivatives, but also derivatives with central counterparties (“CCPs”) and other financial market utilities (“FMUs”). The final rule should also confirm the ability of a covered entity’s counterparty to exercise default rights arising from a failure of the direct party to satisfy a payment or delivery obligation during the stay period.

Furthermore, the letter argues for expanding the scope of creditor protections to a QFC with a covered entity where the QFC is supported by a non-U.S. credit support provider that is not a covered entity. Lastly, the letter notes certain technical clarifications should be made to Section 252.84(b)(2) of the NPR to clarify that the limitations of this provision permit the exercise of creditors protection rights to the extent permitted under the U.S. special resolution regime.

For more information, please contact Robert Hatch,