The House Financial Services Committee last week passed bipartisan bills to fix unintended consequences of derivatives provisions in the Dodd-Frank Act, to promote greater accountability at the Securities and Exchange Commission (SEC), and to help implement the JOBS Act. The committee also passed H.R. 1062, a bill introduced by Rep. Scott Garrett (R-NJ) that would direct the SEC to conduct cost-benefit analyses to ensure that the benefits of any rulemaking outweigh the costs.
Below is a summary of legislation recently passed by the House Financial Services Committee:
H.R. 634, The Business Risk Mitigation and Price Stabilization Act of 2013, would exempt end-users from the margin and capital requirements of Title VII of the Dodd-Frank Act. During consideration of the Dodd-Frank Act, a colloquy among the chairmen of the four committees with primary jurisdiction over Title VII clarified Congress's intent that the Act did not grant regulators the authority to impose margin requirements for end-user transactions. Notwithstanding this expression of Congressional intent, some regulators have interpreted Title VII as granting them the authority to impose margin requirements on end-users merely because they are counterparties to swaps with a regulated entity, such as a swap dealer or financial institution.
H.R. 677, the Inter-Affiliate Swap Clarification Act, would exempt inter-affiliate trades from the Dodd-Frank Act's margin, clearing, and reporting requirements. Inter-affiliate swaps are swaps executed between entities under common corporate ownership. Inter-affiliate swaps allow a corporate group with subsidiaries and affiliates to better manage risk by transferring the risk of its affiliates to a single affiliate and then executing swaps through that affiliate. Inter-affiliate swaps do not create additional counterparty exposures or increase the interconnectedness between parties outside the corporate group; nonetheless, the Dodd-Frank Act subjects inter-affiliate swaps to the same requirements as swaps between unrelated parties.
H.R. 701 would require the SEC to finalize the rules to implement Title IV also known as "Regulation A+" by October 31, 2013. Title IV of the Jumpstart Our Business Startups Act (JOBS) Act requires the SEC to adopt or amend SEC regulations to encourage capital formation without requiring an SEC registration statement. These exemptions, referred to as "Regulation A+," create a new category of public offerings exempt from SEC registration of up to $50 million raised over a 12-month period through issuance of equity securities, debt securities or debt securities convertible or exchangeable to equity interests, including any guarantees of such securities. Regulation A currently provides a similar exemption for public offerings up to $5 million over 12 months. To protect investors, the JOBS Act requires companies that make offerings under Regulation A+ to file audited financial statements with the SEC on an annual basis and gives the SEC the ability to require these issuers to make periodic disclosures about their operations, financial condition, use of proceeds and other information it deems appropriate. The SEC has not proposed rules to implement Regulation A+, and the JOBS Act did not set a deadline for the adoption of these rules.
H.R. 742, the Swap Data Repository and Clearinghouse Indemnification Act of 2013, would remove an indemnification requirement imposed on foreign regulators by the Dodd-Frank Act as a condition of obtaining access to data repositories. Sections 728 and 763 of the Dodd-Frank Act require swap data repositories and security-based swap data repositories to make data available to non-U.S. financial regulators, including foreign financial supervisors, foreign central banks, and foreign ministries. Before a U.S. data repository can share data with a foreign regulator, however, the foreign regulator must agree that it will abide by applicable confidentiality requirements and that it will indemnify the data repository and the SEC or the Commodity Futures Trading Commission (CFTC) for litigation expenses that may result from the sharing of data with the foreign regulator. Section 725 imposes similar requirements for data sharing between derivatives clearing organizations and foreign regulators, including the requirement that foreign regulators indemnify derivatives clearing organizations and U.S. regulators for litigation expenses that may result from the sharing of data with foreign regulators. These indemnification provisions threaten to make data sharing arrangements with foreign regulators unworkable.
H.R. 801, the Holding Company Registration Threshold Equalization Act of 2013, would amend Title VI of the Jumpstart Our Business Startups Act ("JOBS Act"). Title VI raised the shareholder registration threshold with theSEC from 500 to 2,000 and increased the deregistration threshold from 300 to 1,200 for banks and bank holding companies. The JOBS Act did not explicitly extend the thresholds to savings and loan holding companies (SLHCs). However, it was not the intention of Congress to treat SLHCs differently from bank and bank holding companies. To further support this position, the House Appropriations Committee included report language in the Fiscal Year 2013 Financial Services and General Government appropriations bill to clarify that Congress intended for Title VI of the JOBS Act to apply to SLHCs and to urge the SEC to use its existing authority to ensure this result. This legislation extends the same flexibility to savings and loan holding companies, ensuring that they can deploy capital throughout the communities they serve.
H.R. 992, the Swaps Regulatory Improvement Act, would repeal most of Section 716 of the Dodd-Frank Act. Section 716 prohibits "federal assistance"—defined as "the use of any advances from any Federal Reserve credit facility or discount window . . . [or] Federal Deposit Insurance Corporation insurance or guarantees"— to "swaps entities," which include swap dealers and major swap participants, securities and futures exchanges, swap-execution facilities, and clearing organizations. Section 716— known as the swap desk "push out" or "spin off" provision—forces financial institutions that have swap desks to move them into an affiliate to preserve their access to Federal Reserve credit facilities and federal deposit insurance. Although the provision allows banks to continue dealing in swaps related to interest rates, foreign currency, and swaps permitted under the National Bank Act, they are prohibited from engaging in swaps related to commodities, equities, and credit. Rather than making the financial system more stable, Section 716 appears to have made it more fragile. Federal Reserve Board Chairman Ben Bernanke has noted that Section 716 "would make the U.S. financial system less resilient and more susceptible to systemic risk" because "forcing [commercial and hedging activities] out of insured depository institutions would weaken both financial stability and strong prudential regulation." To address this unintended consequence, H.R. 992 would repeal all of Section 716 except subsection (i), which prohibits the use of taxpayer funds to bail out swaps entities.
H.R. 1062, the SEC Regulatory Accountability Act, would direct the SEC to follow President Obama's Executive Order No. 13563, which requires government agencies to conduct cost-benefit analyses to ensure that the benefits of any rulemaking outweigh the costs. The Executive Order also requires that regulations be accessible, consistent, written in plain language, and easy to understand. Because the SEC is an independent agency, it is not required to follow the Executive Order. Former SEC Chairman Mary Schapiro indicated that the SEC will abide by the Executive Order. This bill codifies the Executive Order, mandating by statute that the SEC conduct cost-benefit analyses rather than leaving the decision to comply with the Executive Order to the discretion of the SEC's Chairman. H.R. 1062 requires the SEC to identify the problem to be addressed by a proposed regulation and to assess the significance of that problem before the SEC issues a rule. The legislation requires the SEC's Chief Economist to conduct a cost-benefit analysis of potential rules to ensure that the burdens on economic growth and job creation from a proposed regulation do not outweigh the benefit of the regulation.
H.R. 1256, the Swap Jurisdiction Certainty Act, would require the SEC and CFTC to jointly issue rules relating to swaps transacted between U.S. persons and non-U.S. persons. H.R. 1256 would also exempt a non-U.S. person in compliance with the swaps regulatory requirements of a G20 member nation from U.S. swaps requirements unless the SEC and CFTC jointly determine that the regulatory requirements are not "broadly equivalent" to U.S. swaps requirements. Title VII of the Dodd-Frank Act seeks to regulate the over-the-counter derivatives (OTC) market similar to the way that equities and futures exchanges are regulated. Because the OTC market is global, Title VII raises questions about the extent to which U.S. regulations will apply to swap and security-based swap transactions that take place outside the U.S. Title VII's plain language makes clear that Congress intended it to apply outside the U.S. only in certain limited circumstances. Section 722 directs that provisions relating to swaps will not apply to activities outside the U.S. unless those activities (1) have a direct and significant connection with activities in, or effect on, commerce of the United States or (2) contravene anti-evasion rules promulgated by the CFTC. The comments and actions of U.S. regulators indicate that they are considering regulations that would result in Title VII being applied more broadly than Congress intended. Further, the Dodd-Frank Act requires both the CFTC and the SEC to issue rules on the extraterritorial scope of Title VII, creating the possibility of two different, potentially conflicting, regulatory regimes.
H.R. 1341, the Financial Competitive Act of 2013, requires the Financial Stability Oversight Council (FSOC) to study the likely effects of the differences between the U.S. and other jurisdictions in implementing the derivatives credit valuation adjustment (CVA) capital requirement. The Capital Requirements Directive IV package, announced by the European Union on February 28, 2013, includes the CVA requirement and Basel III, which will implement internationally agreed-upon standards on capital and liquidity across the European Union. Derivatives transactions with sovereign, pension fund and corporate counterparties (which are exempt from clearing obligations) will be exempt from the CVA. The EU CVA exemption has raised concerns that there will not be global derivatives regulatory alignment and that the CVA exemption could impact the pricing of trades and the amount of liquidity available for non-financial U.S. derivative end-users, as their transactions would not receive the CVA exemption.