Among dozens of proposals, the report on capital markets regulation recommends repeal of Dodd-Frank rules on CEO pay ratio, conflict minerals and resource extraction; calls for greater coordination between SEC, CFTC on swaps rules; addresses market structure issues

The Treasury Department on October 6, released the second in a series of reports outlining how financial regulations should be revisited according to the Trump Administration's "core principles" on financial reform. After an initial report in June on regulations in the banking sector, this report focuses on capital markets rules overseen by the Securities Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA) and other regulatory bodies.

Attached with this alert please find PDFs of Treasury's report (232 pages), a fact sheet on the report and a press release from Treasury. These materials were also posted here.

President Trump's Executive Order 13772, issued on February 3, listed the administration's seven principles for financial reform and mandated that Treasury produce a number of reports assessing how existing regulations — promulgated by the 2010 Dodd-Frank Act and other laws and rules — could be modified, repealed or left alone. Treasury then began a process of "consulting extensively with a wide range of stakeholders, including trade groups, financial services firms, consumer and other advocacy groups, academics, experts, financial market utilities, investors, investment strategists, and others with relevant knowledge," as well as Financial Stability Oversight Council (FSOC) member agencies, according to today's report. The report says there are "significant reforms that can be undertaken to promote growth and vibrant financial markets while maintaining strong investor protections."

In a statement accompanying the report, Treasury Secretary Steven Mnuchin said, "By streamlining the regulatory system, we can make the U.S. capital markets a true source of economic growth which will harness American ingenuity and allow small businesses to grow."

Highlights of the report

While the report calls for some reforms that would require legislation, many are changes that could be made by regulators through a rulemaking process. The report organizes its analysis and recommendations into nine categories: Access to Capital, Equity Market Structure, the Treasury Market, Corporate Bond Liquidity, Securitization, Derivatives, Financial Market Utilities, Regulatory Structure and Process, and International Aspects of Capital Markets Regulation.

Conflict minerals, resource extraction, pay ratio: Notably, the report recommends that four Dodd-Frank provisions, which have prompted litigation and other opposition from industry groups, be repealed outright through legislation:

— Dodd-Frank Section 1502, which requires public companies to disclose annually whether they use "conflict minerals" originating in the Democratic Republic of the Congo or neighboring countries
— Section 1503, which requires mining companies to include information about mine safety and health in the quarterly and annual reports they file with the SEC
— Section 1504, which requires energy companies to disclose payments made to foreign governments in exchange for rights to extract oil, gas and minerals
— Section 953(b), which requires public companies to disclose the ratio between the CEO's compensation and that of a median employee

The report notes that these four provisions would be repealed by HR 10, the Financial CHOICE Act, which was passed by the House in June. In the absence of legislation repealing these provisions outright, "Treasury recommends that the SEC consider exempting smaller reporting companies (SRCs) and emerging growth companies (EGCs) from these requirements."

Risk retention: The report recommends that the Dodd-Frank Act's risk retention provisions, which require loan securitizers to retain a percentage of loans on their own books in order to give them "skin in the game," should be changed but not repealed. "Risk retention is an imprecise mechanism by which to encourage alignment of interest between sponsors and investors," it states. "Instead of recommending an across the-board repeal of the retention requirement, Treasury recommends that federal banking regulators expand qualifying risk retention exemptions across eligible asset classes based on the unique characteristics of each securitized asset class, through notice-and-comment rulemaking."

Accredited investors: The report recommends that the SEC expand the definition of "accredited investor" to allow a broader group of investors to participate in private placements and other vehicles. Treasury says the SEC and CFTC should also avoid "regulating through guidance," and the CFTC in particular should rely less on "no action" letters.

OTC derivatives: The report affirms a fundamental Dodd-Frank rule requiring that most derivatives trades go through clearinghouses. Broadly, the report also evaluates the "regulatory overlap" between the SEC and CFTC in the oversight of over-the-counter derivatives under Dodd-Frank's Title VII, and recommends that the two agencies "undertake and give high priority to a joint effort to review their respective rulemakings in each key Title VII reform area. The goals of this exercise should be to harmonize rules and eliminate redundancies to the fullest extent possible." The report says the CFTC and bank regulators should consider creating different classes of swaps "end users" for the purposes of margin on uncleared swaps.

Market Structure: The report includes a number of recommendations for changes to equity market structure, such as: 1) Having the SEC consider rules to mitigate potential conflicts of interest arising from compensation arrangements such as maker-taker and payment for order flow; 2) amending Regulation NMS to allow issuers of less-liquid stocks to choose to trade their securities on a smaller number of venues, or just a single exchange, until the stock becomes more liquid; 3) allowing issuers to determine their tick size for trading; and 4) exempting less-liquid stocks from restrictions on rebates and payment for order flow, if that would promote greater market-making.

Crowdfunding: The report recommends that the SEC increase the amount of money that start-ups and smaller companies can raise through online "crowdfunding" to $5 million from $1 million annually.

Global regulators: The report includes a series of recommendations on the U.S. posture within global financial rulemaking bodies such as the Basel Committee on bank capital and the Financial Stability Board (FSB), and how U.S. regulators should respond to rules approved by such bodies.

Treasury is expected to release two other regulatory assessments this month as called for by Executive Order 13772: 1) on financial technology, and 2) regulation of the asset management and insurance industries. Other executive orders issued by the President require two additional reports by Treasury on Dodd-Frank's Orderly Liquidation Authority for resolving large financial firms, and the FSOC's regime of designating certain large non-banks as systemically important financial institutions (SIFIs).

If you have questions, or need additional information, please feel free to contact Will Heyniger or Bob Schellhas at (202) 293-7474.

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ATTACHMENTS

Capital Markets Fact Sheet

Financial System