Regulatory Developments
SEC Expands Exemptive Relief to Mutual Funds Using Manager-Subadviser Structure
On May 29, the SEC issued an order expanding the relief available to mutual funds using a manager-subadviser structure.The SEC has issued many orders permitting a mutual fund to enter into or materially amend a subadvisory agreement without shareholder approval, but previous orders have been limited to subadvisers that are either wholly-owned by or unaffiliated with the sponsoring investment adviser.The most recent order expands the relief to cover all subadvisers, including those that are affiliated with the sponsoring investment adviser, even if not wholly-owned.In the notice of application, the applicants stated that the potential conflicts associated with an affiliated subadviser, whether wholly-owned or partially-owned, are appropriately addressed by the conditions imposed by the order.
SEC’s OCIE Publishes Risk Alert on Safeguarding Electronic Customer Records and Information
On May 23, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published a risk alert on the safeguarding of electronic customer records and information stored on third-party solutions (e.g., the cloud) by broker-dealers and investment advisers. OCIE noted that, although the majority of third-party storage solutions offer encryption, password protection and other security features designed to prevent unauthorized access, firms sometimes incorrectly use available security features, or fail to use such features altogether. OCIE suggested that broker-dealers and investment advisers implement a configuration management program that includes policies and procedures governing data classification, vendor oversight and security features to mitigate any risks stemming from the installation of network storage solutions. OCIE noted, based on observations from recent examinations, that such a program could include: (i) policies and procedures designed to support the initial installation, ongoing maintenance and regular review of a network storage solution; (ii) guidelines for security controls and baseline security configuration standards; and (iii) vendor management policies and procedures that include, among other things, regular implementation of software patches and hardware updates followed by reviews to ensure that those patches and updates did not unintentionally change, weaken or otherwise modify any security configuration.
CFPB Publishes Spring 2019 Rulemaking Agenda
On May 22, the CFPB published its spring 2019 rulemaking agenda, which lists the regulatory matters that the CFPB reasonably anticipates having under consideration during the period from May 1, 2019, to April 30, 2020. The CFPB’s agenda includes items falling into three distinct categories:
- Implementing statutory directives, including provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act regarding Property Assessed Clean Energy (PACE) financing and exemptions from certain Home Mortgage Disclosure Act (HMDA) reporting requirements, and provisions of the Dodd-Frank Act requiring the CFPB to implement regulations regarding the Equal Credit Opportunity Act;
- Continuing existing rulemaking, including proposals regarding the reconsideration of a 2017 rule titled Payday, Vehicle Title, and Certain High-Cost Installment Loans, increases to HMDA reporting thresholds, and communication practices and consumer disclosures in the debt collection market; and
- New projects and further planning on matters including international remittance transfers, an assessment of the ability-to-repay and qualified mortgage rules, and further review of existing regulations in areas such as the consolidation of various mortgage origination disclosures under the Truth in Lending Act and Real Estate Settlement Procedures Act and the impact of certain regulations concerning overdraft services on small banks and credit unions.
OCC Issues Final Rule Giving National Bank Powers to Covered Savings Associations
On May 24, the OCC issued a final rule (Rule) implementing Section 206 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which requires the OCC to issue regulations to allow federal savings associations with total consolidated assets of $20 billion or less as of December 31, 2017, to elect to operate with national bank powers without having to change their charters.
As previously reported in the Roundup, a federal savings association that makes the election (covered savings association) generally will have the same rights and privileges as a national bank that has its main office in the same location as the covered savings association’s home office and will be subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to such a national bank. Under the Rule, a covered savings association would be required to divest, conform, or discontinue nonconforming subsidiaries, assets, and activities that would not be permissible for national banks, but the covered savings association would be permitted to keep its existing charter and governance processes and would continue to be treated as a federal savings association for purposes of consolidations, mergers, dissolutions, conversions, conservatorship, and receivership. To reduce unnecessary burden, the Rule also allows covered savings associations to continue to use federal savings association procedures rather than national bank procedures where the application of those procedures would not result in substantively different outcomes. The adopting release for the Rule includes a table summarizing selected provisions of federal law and their applicability to covered savings associations. The OCC did not clarify how a covered savings association would be treated with respect to Federal Reserve membership, savings and loan holding companies (including grandfathered unitary savings and loan holding companies), or the Federal Home Loan Bank system, and instead referred organizations with specific questions about such topics to other agencies. The Rule takes effect July 1, 2019.
Agencies Announce Final Rule on Treatment of Certain Municipal Obligations
On May 2, the OCC, the FDIC, and the Federal Reserve jointly adopted a final rule amending the liquidity coverage ratio rule to treat liquid and readily-marketable, investment-grade municipal obligations as high-quality liquid assets. The final rule adopts unchanged the interim rule published in August 2018, as covered by the September 13, 2018 edition of the Roundup. The final rule will be effective 30 days after publication in the Federal Register.
On May 24, the OCC, Federal Reserve and FDIC (collectively, the agencies) invited comment on a proposal that would determine (1) the application of regulatory capital requirements to certain U.S. intermediate holding companies of foreign banking organizations and their depository institution subsidiaries and (2) the application of standardized liquidity requirements with respect to certain U.S. operations of large foreign banking organizations and certain of their depository institution subsidiaries, each according to risk-based categories.
The capital proposal would modify the capital requirements applicable to large U.S. intermediate holding companies of foreign banking organizations — specifically, those with at least $100 billion in total consolidated assets — and their depository institution subsidiaries according to the proposed risk-based categories.
The liquidity proposal would require a foreign banking organization that meets certain criteria to comply with liquidity coverage ratio and net stable funding ratio requirements with respect to any U.S. intermediate holding company and certain depository institution subsidiaries thereof; in addition, the Federal Reserve requested (but did not propose) comment on whether it should impose standardized liquidity requirements on such foreign banking organizations with respect to their U.S. branch and agency networks, as well as possible approaches for doing so.
Comments on the proposals must be received by June 21, 2019.
Financial Crimes Enforcement Network Announces FinCEN Innovation Hours Program
On May 24, the Financial Crimes Enforcement Network (FinCEN) announced its Innovation Hours Program (the Program) aimed at providing financial and regulatory technology companies and financial institutions with the opportunity to present their new and emerging products and services to FinCEN. The Program is part of the FinCEN Innovation Initiative, which aims to provide a better understanding of the challenges of the Bank Secrecy Act and Anti-Money Laundering compliance for these companies. FinCEN will host dedicated hours for users and providers of regulatory and financial technology to discuss Bank Secrecy Act related products and services. FinCEN has set forth minimum requirements to be met in order to participate in the Program, which can be found on the FinCEN FAQ page along with other useful information. FinCEN will host meetings on the second Thursday of each month from 9:30 a.m. to 12:30 p.m. EST, with the locations to be publicly announced prior to the meeting.
Goodwin News
Please join Goodwin’s Fintech practice group and FS Vector at Goodwin’s San Francisco office to discuss strategies for bringing a fintech product to market using a bank partnership, lending or money transmitter licenses, or your own bank charter. This program will include workshops for fintech companies with lending, payments and deposit products on strategy execution and how to be best positioned for your next investment round. The sessions will also be valuable for banks and investors. Cocktail and networking reception follows panels. For registration information, please click here.
This week’s Roundup contributors: Alex Callen, Jessica Craig, Mac Laban, and Bill McCurdy.