The Financial CHOICE Act and the Department of Treasury's Recommended Regulatory Changes Affecting Derivatives and Private Funds
The House of Representatives recently passed H.R. 10, the Financial Choice Act (the Choice Act), in an effort to repeal and/or replace critical sections of the Dodd-Frank Act. The Choice Act is now in the Senate, which may make changes to the version that passed in the House. The Department of Treasury also recently released its report proposing changes to the Dodd-Frank Act. In this Client Alert, we identify certain changes in the Choice Act and the Department of Treasury's recommendations pertaining to derivatives and private funds.
- Derivatives. The Dodd-Frank Act subjected swaps to regulation by the Commodities Futures Trading Commission (CFTC) and security-based swaps to regulation by the Securities and Exchange Commission (SEC). The Choice Act leaves this structure in place, but, subject to certain trade-reporting and risk-management standards, exempts certain swaps between affiliated entities from regulation. Other pending legislation (H.R. 238, the Commodity End-User Relief Act) would also provide exemptions from mandatory swap clearing requirements for finance companies and smaller bank holding companies, as well as other end-users of agricultural and other physical commodities. This legislation, however, is on a different congressional path than the Choice Act and time will tell how significant the changes will be in the final legislation. Further, the Department of Treasury has recommended that the initial margin of centrally-cleared derivatives should be exempted from the calculation of a bank's total exposure for purposes of its capital requirements.
- Private Funds. There are six significant changes that private fund managers should be aware of regarding the Choice Act. First, the Choice Act simplifies and streamlines certain provisions of Regulation D's private placement exemption for private funds. Second, the Choice Act includes licensed securities professionals and certain persons qualified under FINRA rules as "accredited investors." Third, privately offered qualifying venture capital funds with no more than USD 50 million in capital commitments and up to 500 beneficial owners would be exempt from registration under the Investment Company Act of 1940 (the ICA). This would allow these funds to accept investors who are not "qualified purchasers" and still avoid registration. Fourth, the SEC would have rulemaking authority to exempt private equity fund managers from the Investment Advisers Act of 1940’s (Advisers Act) registration and reporting requirements, as well as the authority to amend the recordkeeping provisions for private equity fund advisers. Fifth, the Choice Act would remove any reference to the Financial Stability Oversight Council (FSOC) in the SEC's authority to require recordkeeping and reporting, and would eliminate required systematic risk reporting by investment advisers. Finally, the Choice Act would repeal the Department of Labor's Fiduciary Rule, which recently became effective.
- Volcker Rule. The Choice Act also repeals sections of the Dodd-Frank Act that prohibit banks from engaging in proprietary trading and sponsoring covered funds, known as the Volcker Rule. Provisions of the Volcker Rule previously required extensive recordkeeping and reporting to ensure compliance with its provision, but the Choice Act eliminates these requirements. The Department of Treasury has also recommended large scale changes to the Volcker Rule. It suggests removing banks with under USD 10 billion in total assets from the purview of the rule entirely, and allowing regulators to determine whether larger banks need to comply. It further recommends refining the definitions and provisions of the rule to allow for harmonization across the reviewing agencies.
- Private Placements. Finally, the Choice Act would provide additional relief in connection with private placements, building upon changes made to securities laws several years ago by the Jobs Act. First, it would expand the safe harbor in the Securities Act of 1933 (Securities Act) to include certain private resales of securities to accredited investors. It would also add an exemption for Micro-Offerings, which are offerings made to fewer than 35 purchasers who have substantial pre-existing relationships with an officer, director or 10% shareholder of the issuer. It would further direct the SEC to determine that certain speaking events do not violate Regulation D's prohibition against general solicitation or advertising. The exempted communications include presentations and communications at events sponsored by universities and other higher education institutions, trade associations, nonprofit organizations, venture forums, venture capital associations, and angel investor groups. The SEC would also have the ability to determine other groups that can qualify for the exemptions. Finally, it would direct the SEC to revise Regulation D in order to abbreviate private placement filing requirements.