U.S. Financial Industry Developments

Economic Growth, Regulatory Relief and Consumer Protection Act

The "Economic Growth, Regulatory Relief and Consumer Protection Act," signed by the President on May 24, amends Section 3(c)(1) of the Investment Company Act of 1940 to provide that a "qualifying venture capital fund' may have as many as 250 beneficial holders of its securities – an increase from 100 beneficial holders.

A "qualifying venture capital fund" is defined to mean "a venture capital fund that has not more than $10,000,000 in aggregate capital contributions and uncalled committed capital, with such dollar amount to be indexed for inflation once every 5 years by the [Securities and Exchange] Commission, beginning from a measurement made by the Commission on a date selected by the Commission, rounded to the nearest $1,000,000."

The definition of "venture capital fund" set forth in Rule 203(l)-1 under the Investment Advisers Act of 1940 has not been amended. Click here to view the definition.

The following is the text of the relevant amendment.

SEC. 504. SUPPORTING AMERICA'S INNOVATORS.

Section 3(c)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)(1)) is amended—(1) in the matter preceding subparagraph (A), by inserting ''(or, in the case of a qualifying venture capital fund, 250 persons)'' after ''one hundred persons''; and (2) by adding at the end the following: ''(C)(i) The term 'qualifying venture capital fund' means a venture capital fund that has not more than $10,000,000 in aggregate capital contributions and uncalled committed capital, with such dollar amount to be indexed for inflation once every 5 years by the Commission, beginning from a measurement made by the Commission on a date selected by the Commission, rounded to the nearest $1,000,000.'(ii) The term 'venture capital fund' has the meaning given the term in section 275.203(l)–1 of title 17, Code of Federal Regulations, or any successor regulation.''

The public law has not been printed yet and so is not available online. The foregoing excerpt is from the attached enrolled version which will become the public law. Release.

SEC Proposes FAIR Act Rules to Promote Research Reports on Investment Funds

On May 23, 2018, the Securities and Exchange Commission ("SEC") proposed rules and amendments intended to promote research on mutual funds, exchange traded funds, registered closed-end funds, business development companies, and similar covered investment funds.

The Commission believes that the proposal would reduce obstacles to providing research on investment funds by harmonizing the treatment of such research with research on other public entities.

If adopted, the proposal would generally establish a safe harbor for a broker or dealer to publish or distribute research reports on investment funds under certain conditions. This proposed safe harbor is similar to a regulatory safe harbor that currently exists for research reports about other public entities.

The public comment period will remain open for 30 days following publication of the proposing release in the Federal Register. Release.

FHFA Issues New Prepayment Monitoring Report

On May 22, 2018, the Federal Housing Finance Agency ("FHFA") issued a report through first quarter of 2018 in order to provide transparency and insight to market participants about how it monitors prepayment rates of Fannie Mae and Freddie Mac. Release

CFTC Staff Issues Advisory for Virtual Currency Products

On May 21, 2018, the Commodity Futures Trading Commission ("CFTC") Division of Market Oversight and Division of Clearing and Risk issued a joint staff advisory giving exchanges and clearinghouses registered with the CFTC guidance for listing virtual currency derivative products. Release.

Statement of the Bureau of Consumer Financial Protection on Enactment of S.J. Res. 57

On May 21, 2018, the President signed into law a bipartisan Congressional resolution disproving a rule in the form of guidance issued by the Bureau of Consumer Financial Protection about indirect lender compliance with the Equal Credit Opportunity Act.

European Financial Industry Developments

The EC has Published Proposals to Amend Existing Legislation to Promote the Use of Small and Medium-Sized Enterprise (SME) Growth Markets

On May 24, 2018, the European Commission ("EC") published:

• A draft Regulation to amend the Market Abuse Regulation (Regulation 596/2014) ("MAR") and the Prospectus Regulation ((EU) 2017/1129) in respect of promotion of the use of small and medium-sized enterprise ("SME") growth markets.
• A draft Delegated Regulation amending Delegated Regulation (EU) 2017/565 (the Commission Delegated Regulation) as regards certain registration conditions to promote the use of SME growth markets.

The MiFID II Directive (2014/65/EU) created a new type of trading venue, the SME growth market, as a sub-group of multilateral trading facilities ("MTFs"), to facilitate access to capital for SMEs and the further development of specialist markets to cater for the needs of SME issuers. However, the current definition of SMEs is not suitable for companies issuing bonds. In addition, SME growth market debt-only issuers have to produce a semi-annual financial report. This is a more stringent requirement than the one applying to issuers of bonds to professional investors on regulated markets.

Addressing these specific issues, the Commission's proposals include measures that will make it easier for trading venues specialised in bond issuance to register as SME growth markets. This will be done by formulating a new definition of debt-only issuers; being those that issue less than EUR 50 million of bonds over a 12-month period.

The proposals also give more flexibility for SME growth market operators on whether or not to impose the obligation to produce semi-annual reports on SME debt-only issuers.

Other proposals include an exemption for privately-placed bonds from the 'market sounding regime' (subject to conditions). Market sounding is where information is given prior to the announcement of a transaction to gauge the interest of potential investors.

The EC has Published the Draft Text of a Regulation on Sovereign Bond-Backed Securities and Seeks Market Feedback on its Proposals

On May 24, 2018, the European Commission ("EC") published a proposal for a Regulation of the European Parliament and of the Council on sovereign bond-backed securities (2018/0171 (COD)). Sovereign bond-backed securities ("SBBS") are euro-denominated debt securities, created by private entities and backed by a pre-determined, diverse pool of bonds issued by euro-area national governments.

Akin to securitisation bonds, this new type of financial instrument is designed to be issued in tranched notes, appealing to a range of risk appetites. Senior ranking notes would pay a lower return than junior notes, in exchange for a lower risk profile. Junior notes would bear losses before senior notes but would be rewarded with a higher coupon.

Rather than being subject to the same regulatory treatment as securitisation bonds, the proposal seeks to grant SBBS the same regulatory treatment as national euro-area sovereign bonds denominated in euro; reflecting the relatively low risk and high liquidity of the pre-determined and diverse underlying portfolio of sovereign debt.

The draft Regulation follows the Commission's publication of an impact assessment on enabling a regulatory framework for the development of SBBS, in January 2018.

The proposal includes measures relating to:

• Eligibility and composition of the underlying portfolio and tranching of SBBSs issues (Articles 4 to 6 of the draft Regulation).
• Issuance and management of SBBSs (Articles 7 and 8).
• Use of the designation "Sovereign Bond-Backed Securities" (Article 9).
• SBBSs notification and transparency requirements (Articles 10 to 12).

Specifically, the proposed Regulation requires:

• The underlying portfolio to include sovereign bonds of all euro area Member States, with relative weights in line with each Member State's contribution to the capital of the European Central Bank (the so-called ECB capital key).
• The size of the senior tranche to be fixed at 70% of the overall SBBS issuance. The remaining 30% can be divided in as many sub-senior (or subordinate) claims as the issuer finds best suited to the demand of its investors.

The Commission is inviting market feedback on its proposals. The feedback period is open and ends on July 26, 2018.

Rating Agency Developments

On May 23, 2018, Moody's published an updated methodology for rating central clearing houses, replacing the one from September 11, 2017. Release.