Progeny of S. 2155 Proliferate (June 20)

Update 280: Progeny of S. 2155 Proliferate; Hensarling’s HFSC on a Deregulatory Mission

After S. 2155, this year’s wide-ranging banking bill, was signed into law last month, House Financial Services (HFSC) Chair Rep. Jeb Hensarling—perhaps emboldened by the wide margins by which S. 2155 passed—has continued his crusade against the United States’ financial regulatory regime.   

In May, Rep. Blaine Luetkemeyer said he expected Hensarling to advance a series of securities and capital markets deregulation bills.  They have since moved quickly and are worth watching as stand-alones or attached to large legislative vehicles.

Best,

Dana

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Here are the highlights for five of the most consequential bills recently adopted by Hensarling’s Committee, with varying degrees for bipartisan support.  

• H.R. 6035, Streamlining Communications for Investors Act

The Streamlining Communications for Investors Act was introduced on June 7, by Rep. Ted Budd, a vulnerable North Carolina Republican on the DCCC’s “Red to Blue” watch list. H.R. 6035 directs the SEC to revise Rule 163(c) to allow a well-known seasoned issuer (WKSI) to authorize an underwriter or dealer to act as its agent or representative. The representative/agent acts by communicating about offerings of the issuer’s securities prior to the filing of a registration statement. H.R. 6035 cleared the HFSC along party lines 31-23.

H.R. 6035 is probably too deregulatory to survive in the Senate if passed by the House as a stand-alone, but it could still pass in a package of bills. H.R. 6035 should be on a watch list for those worried about capital markets law. As Ranking Member Waters put it in the markup, “Simply because the WKSI is familiar with the regulators doesn’t mean the security they offer is not risky.”

• H.R. 5749, Options Market Stability Act

The Options Market Stability Act was introduced on May 10 by Rep. Randy Hultgren, a vulnerable Illinois Republican facing serious opposition from Democrat Lauren Underwood in the fall. Last week, H.R. 5749 passed the HFSC 53-0 after an amendment by Democratic Rep. Bill Foster was adopted by the full committee. The bill would implement a risk-adjusted approach to value centrally-cleared options as it relates to capital rules to more accurately reflect exposure and promote options market-making activity.  

The Current Exposure Method requires options contracts to be calculated on their notional face-value rather than through a risk-adjusted value which reflects actual exposures. Changing this calculation will incentivize the use of hedged positions and would reduce the amount of capital required to place those positions and reduce overall exposure.

Rep. Foster’s amendment to the bill would direct regulators to adopt a calculation of counterparty credit risk. After passing HFSC unanimously, H.R. 5749 has a good chance of being adopted by the Senate given its full bipartisan support.

• H.R. 5877, Main Street Growth Act

The Main Street Growth Act was introduced in the House in May by Rep. Tom Emmer, who represents a safely Republican district in central Minnesota. On June 7, the HFSC reported the bill out 56-0.  The measure allows venture exchanges to register under the Securities Exchange Act, allowing non-public companies in their early stages to trade shares without oversight from state securities regulations. Since long-term returns from public markets generally outperform returns from venture exchanges, incentivizing venture investments over public markets investments could prove dangerous.

Some observers characterize the Main Street Growth Act as the “Jobs Act 2.0.”  The 2012 Jobs Act eased securities regulations and created a way for companies to use crowdfunding to issue securities. Consumer groups criticized the Jobs Act for potentially increasing investor exposure to fraud. There is little evidence the Jobs Act ultimately spurred much hiring, if any.

• H.R. 5323, Derivatives Fairness Act

The Derivatives Fairness Act was introduced on March 19 by Rep. Warren Davidson, a safe-seat Republican representing a western-Ohio district. The measure cleared the House Financial Services Committee by a recorded vote of 34-26 on March 21. The bill would eliminate the requirement that banks hold capital against certain uncleared derivatives. Specifically, banks would be allowed to remove derivatives from fair value adjustment, interrupting banks’ protection against the failure of counterparties to pay derivatives obligations.

Credit valuation adjustment requirements were put in place following the 2008 financial crisis. Ostensibly, H.R. 5323 is meant to ensure that United States companies are not disadvantaged relative to their European counterparts, who pay less for derivatives. However, there is little compelling evidence to demonstrate that derivatives are negatively impacting American companies compared to their overseas competitors, and this bill is yet another proposal for deregulation without desideratum.

• H.R. 5037, Securities Fraud Act of 2018

The Securities Fraud Act of 2018 was introduced on February 15 by Rep. Thomas MacArthur, a vulnerable Republican representing a flippable New Jersey district that Hillary Clinton won. The bill ostensibly aims to reduce state enforcement burdens on companies listed on national securities exchanges by reducing some state-level oversight on these exchanges.

The bill cites differences between state and federal civil enforcement actions, as well as the burden of dual regulatory regimes, as an encumbrance to publicly traded companies in the United States. By eliminating state regulatory requirements and oversight, the bill would jeopardize investor protections, without clear reason. The SEC also has an ongoing hiring freeze and is understaffed for its current workload; removing state enforcement would further increase the burden on the already overburdened federal regulator.

Ambiguities in the language of the bill make it unlikely to gain sufficient support to clear a house vote without revisions. H.R. 5037 is opposed by Democrats including Rep. Carolyn Maloney, the Ranking Member of the HFSC, Subcommittee on Capital Markets, Securities, and Investments. Joseph P. Borg, director of the Alabama Securities Commission, also opposes the bill, outlining the alternative avenues for capital formation (such as the private market and crowdfunding) as the real reasons behind the lack of public initial public offerings. The bill has four Republican co-sponsors: Davidson, Tenney, McHenry, and Faso and is currently in public hearings.  

Next Steps

Of the above, watch for the Options Market Stability Act and the Main Street Growth Act to advance to the Senate as viable products. Each bill earned unanimous HFSC support. Whether they are buried in the “Senate graveyard” remains to be seen. Regardless, Chair Hensarling will continue to push for deregulation until the end of his time as chair. Watch for a House Financial Services Committee markup tomorrow covering three securities bills, H.R. 5970, H.R. 6130 and H.R. 6139.