Regulatory Developments
OCC Proposes Rule Regarding CRA General Performance Standards
On November 24, in a notice of proposed rulemaking, the OCC invited comment on the approach it would use to determine the CRA evaluation measure benchmarks, retail lending distribution test thresholds and community development minimums under the general performance standards established by the final rule published earlier this year, as covered in a previous edition of the Roundup. In the proposed rule, the OCC stated that it intends to issue an information collection survey to obtain bank-specific information from institutions subject to the general performance standards and will use this information to help calculate CRA evaluation measures and community development minimum calculations for each bank’s assessment areas, as well as a bank-level CRA evaluation measure and community development minimum calculations for each bank, among other things. The proposal also explains how the OCC would assess significant declines in CRA activities levels in connection with performance context following the initial establishment of the benchmarks, minimums and thresholds. Finally, the proposed rule would make clarifying and technical amendments to the 2020 final rule. Comments will be accepted for 60 days following publication in the Federal Register.
SEC Adopts Amendments to MD&A and Financial Disclosures
On November 19, the SEC adopted amendments modernizing and enhancing certain financial disclosure requirements in Regulation S-K. In an effort to sharpen focus on material information, the amendments revise Items 301, 302 and 303 of Regulation S-K by (1) eliminating Item 301 (Selected Financial Data) and (2) modernizing, simplifying and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A). Specifically, these amendments:
- Revise Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes;
- Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
- Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
- Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
- Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
- Replace current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
- Eliminate current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
- Amend current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.
Registrants are required to comply with the rule beginning with the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register (mandatory compliance date). Registrants will be required to apply the amended rules in a registration statement and prospectus that on its initial filing date is required to contain financial statements for a period on or after the mandatory compliance date. Registrants may comply with the final amendments any time after the effective date, so long as they provide disclosure responsive to an amended item in its entirety.
SEC Staff Issues Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns
In light of inquiries received from persons and entities subject to Regulation S-T, on November 20, the staff of the SEC’s Division of Corporation Finance, Division of Investment Management and Division of Trading and Markets issued a statement addressing compliance with the authentication document retention requirements under Rule 302(b) and other logistical issues raised by the COVID-19 pandemic.
Rule 302(b) of Regulation S-T requires that each signatory to documents electronically filed with the SEC under the federal securities laws “manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.” Such documents must be executed before or at the time the electronic filing is made. Further, electronic filers must retain such documents for a period of five years and furnish copies to the SEC or its staff upon request. While the SEC staff expects persons and entities to comply with the requirements of Rule 302(b) to the fullest extent practicable, the staff acknowledged that some persons and entities may have difficulty complying with the requirements due to the COVID-19 pandemic. In light of these difficulties, the staff stated that it will not recommend the SEC take enforcement action with respect to the requirements of Rule 302(b) if:
- a signatory retains a manually signed signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);
- such document indicates the date and time when the signature was executed; and
- the filer establishes and maintains policies and procedures governing this process.
The signatory may also provide to the filer an electronic record (such as a photograph or pdf) of such document when it is signed.
The staff’s statement is temporary and will remain in effect until the staff provides public notice that it no longer will be in effect. The notice will be published at least two weeks before the announced termination date.
SEC’s OCIE Issues Risk Alert regarding Investment Adviser Compliance Programs
On November 19, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert setting forth its observations regarding notable compliance issues related to Rule 206(4)-7 (the Compliance Rule) under the Investment Advisers Act of 1940. Deficiencies or weaknesses identified by OCIE staff in connection with the Compliance Rule include: (i) inadequate compliance resources, such as information technology, staff and training, to support an adviser’s compliance program; (ii) chief compliance officers who lacked sufficient authority within the adviser to develop and enforce appropriate policies and procedures for the adviser; (iii) advisers who were unable to demonstrate that they performed an annual review or whose annual reviews failed to identify significant existing compliance or regulatory problems; (iv) advisers who did not implement or perform actions required by their written policies and procedures; (v) advisers’ policies and procedures that contained outdated or inaccurate information about the adviser, including off-the-shelf policies that contained unrelated or incomplete information; and (vi) advisers who did not maintain written policies and procedures or that failed to establish, implement or appropriately tailor written policies and procedures that were reasonably designed to prevent violations of the Advisers Act. Where firms maintained written policies and procedures, the risk alert identified several areas in which OCIE staff observed deficiencies or weaknesses with establishing, implementing or appropriately tailoring their written policies and procedures, including portfolio management, marketing, trading practices, disclosures, advisory fees, valuation and safeguard of client privacy, required books and records, safeguarding client assets and business continuity plans.
On November 20, the Board of Governors of the Federal Reserve System (Federal Reserve), OCC and Federal Deposit Insurance Corporation (FDIC) (collectively, the Agencies) announced an interim final rule that provides community banking organizations with less than $10 billion in consolidated total assets as of December 31, 2019 with temporary relief from certain regulations and reporting requirements triggered by growth in their asset size due to the coronavirus response. As a result of participating in federal coronavirus response programs, such as the Paycheck Protection Program, many community banking organizations have experienced rapid, unexpected and possibly temporary increases in their asset sizes, which could subject them to new regulations or reporting requirements. The interim final rule provides that community banking organizations that have crossed a threshold, which triggers new regulatory or reporting requirements, generally will have until 2022 to either (1) reduce their size or (2) prepare for new regulatory and reporting standards. This temporary regulatory burden relief applies to the following asset-based regulatory thresholds:
- Eligibility for the community bank leverage ratio framework;
- Debit card interchange fees and routing (the Durbin Amendment);
- Certain management interlocks provisions set forth in Regulation L and Regulation LL;
- Eligibility for the 18 month examination cycle;
- Eligibility for the streamlined method of compliance with the Securities Exchange Act of 1934; and
- Various thresholds for compliance with the Federal Reserve’s regulations governing bank holding companies and change in bank control set forth in Regulation Y.
The interim final rule does not provide relief from CFPB regulatory and supervisory thresholds, nor does it affect compliance with the Volcker Rule. The interim final rule will be effective immediately upon publication in the Federal Register, and comments will be accepted for 60 days after publication in the Federal Register.
OCC Proposes Rule to Ensure Fair Access to Bank Services, Capital, and Credit
On November 20, the OCC issued a notice of proposed rulemaking for a rule that would prohibit national banks and federal savings associations (banks) from declining to provide financial services to controversial industries, such as fossil fuel companies, private prisons, gun manufacturers and others. The OCC asserts that some banks have taken such action with respect to a variety of controversial industries based on “criteria unrelated to safe and sound banking practices,” and the proposal specifically cites complaints by the Alaska Congressional delegation regarding the denial by large banks of financial services to new oil and gas projects in the Arctic. According to the OCC’s proposal, banks are not “equipped to balance risks unrelated to financial exposures and the operations required to deliver financial services.” Among other things, the proposed rule would effectively override banks’ ability to make category-wide evaluations of nonfinancial impacts of servicing controversial industries, including potential loss of customer goodwill and other reputation damage to the bank, which can nonetheless have financial impacts on banks. The proposed rule would, however, allow banks to deny financial services to a specific customer if justified by a “quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the covered bank.” Characterizing this proposal designed to defend controversial industries as a “fair access” rule, the OCC cites as precedent measures historically designed to combat and remediate racial and other forms of discrimination against individuals, such as Equal Credit Opportunity Act, Fair Housing Act and Community Reinvestment Act. The proposed rule would apply to a “covered bank,” which is broadly defined as a bank having the ability to “raise the price a person has to pay to obtain an offered financial service…or significantly impede a person, or a person’s business activities, in favor of or to the advantage of another person.” Banks having total assets of $100 billion would be presumed to be covered banks, however, the proposal does not include an exemption for banks having total assets of less than $100 billion. For purposes of determining who is a “covered bank,” the OCC is also contemplating a separate, alternative threshold presumption linked to a bank’s market share for a given financial service, but it provided few details in the proposal. Comments on the proposed rule must be received on or before January 4, 2021.
OCC Finalizes Update to Activities and Operations Rule
On November 23, the OCC issued a final rule that updates its rules governing the activities and operations of national banks and federal savings associations (collectively, banks). The final rule amends 12 CFR 7 to update or eliminate outdated regulatory requirements that no longer reflect the modern financial system and to clarify and codify recent OCC interpretations. Among the changes are:
- Incorporating and streamlining interpretations addressing permissible derivatives activities for national banks;
- Codifying interpretations to permit banks to engage in certain tax equity finance transactions;
- Codifying interpretations regarding national bank membership in payment systems and clarifying that federal savings associations are subject to the same requirements as national banks;
- Expanding the ability of banks to choose corporate governance provisions under state law;
- Clarifying the extent to which national banks may adopt anti-takeover provisions permissible under state corporate governance law;
- Clarifying when national bank participation in a financial literacy program on the premises of, or a facility used by, a school or other organization would not be a branch;
- Codifying interpretations of the National Bank Act relating to capital stock issuances and repurchases; and
- Applying rules relating to finder activities, indemnification, equity kickers, postal services, independent undertakings, and hours and closings to federal savings associations.
The amendments take effect on April 1, 2021.
OCC Releases New Mutual-to-Stock Conversions Booklet
On November 23, the OCC issued the “Mutual to Stock Conversions” booklet of the Comptroller’s Licensing Manual. The new booklet:
- Provides an overview of policy considerations and decision criteria that the OCC considers when reviewing mutual-to-stock conversion applications;
- Describes various types of mutual-to-stock conversions including standard conversions, merger conversions, conversion mergers and voluntary supervisory conversions;
- Describes the applications process, including the prefiling process, filing and review of the application, the decision and the post-consummation phase of the mutual-to-stock conversion;
- Outlines requirements and procedures federal savings associations should follow when filing an application to convert from mutual-to-stock form of ownership; and
- Lists references and links to informational resources and sample forms and documents that prospective filers may find helpful during the filing and conversion process.
FDIC Seeks Financial Advisor for New “Mission-Driven Bank Fund”
On November 18, the FDIC published a request for proposal seeking one or more financial advisors to support the development of a new Mission-Driven Bank Fund. The Fund will provide a vehicle for private sector and philanthropic investment in FDIC-insured Minority Depository Institutions and Community Development Financial Institutions. The selected financial advisors will work with the FDIC to develop the structural and operational aspects of the Fund. Proposals must be submitted by December 2, 2020. The press release announcing the competition and the Request for Proposal are available here.
On November 18, the Federal Reserve and Consumer Financial Protection Bureau (CFPB) announced that the dollar thresholds for determining exempt consumer credit and lease transactions under Regulation Z of the Truth in Lending Act (TILA) and Regulation M of the Consumer Leasing Act (CLA) will remain at $58,300 in 2021. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that these thresholds be adjusted annually by the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Based on the annual percentage increase in the CPI-W as of June 1, 2020, the protections of the TILA and the CLA generally will apply to consumer credit transactions and consumer leases of $58,300 or less, effective January 1, 2021, not including private education loans and loans secured by real property (e.g., mortgages) which are subject to TILA regardless of the loan amount.
In order to provide guidance for banks on risk-based approaches to customer due diligence for charities and other non-profit organizations (NPOs), the Federal Reserve, FDIC, OCC, National Credit Union Administration and Financial Crimes Enforcement Network released the Joint Fact Sheet on Bank Secrecy Act Due Diligence Requirements for Charities and Non-Profit Organizations (Joint Fact Sheet). Highlights from the Joint Statement include:
- No New Requirements: The Joint Fact Sheet does not amend or change existing regulatory requirements for banks under the Bank Secrecy Act and other anti-money laundering regulatory schemes.
- Committed to Support Charity Work: The governmental agencies that released the Joint Fact Sheet reiterated their support for charities and NPOs, emphasizing how important it is that these organizations receive the financial services and support needed to carry out their missions.
- Risk Based Approach: As with all other accounts, banks must take an individualized risk based approach when conducting their customer due diligence for accounts held by charities and NPOs. That approach must focus on the individual risks and nature of the organization itself.
FHFA Finalizes Capital Rule for Fannie Mae and Freddie Mac
On November 18, the Federal Housing Finance Agency (FHFA) adopted a final rule that establishes a new regulatory capital framework for Fannie Mae and Freddie Mac (the Enterprises). The final rule is substantively similar to the May 20 proposed rule in terms of overall structure and approach. As required by the proposed rule, an Enterprise must maintain tier 1 capital in excess of 4.0% to avoid restrictions on capital distributions and discretionary bonuses. The FHFA made three notable changes to the risk-based capital requirements in addition to a number of other refinements. The notable changes include:
- Increased capital relief for credit risk transfers;
- Reduced capital requirements for single-family mortgage exposures subject to COVID-19-related forbearance; and
- Increased the exposure level risk-weight floor for single-family and multifamily mortgage exposures to 20%.
The FHFA also released a fact sheet on the final rule.
SEC Adopts New Regulatory Framework for Registered Fund Derivative Investments
On October 28, the SEC adopted Rule 18f-4 (the Rule) under the Investment Company Act of 1940 and amended related rules designed to provide a modernized, comprehensive approach to the regulation of derivative investments by mutual funds (other than money market funds), exchange-traded funds, registered closed-end funds and business development companies. Read the client alert for an overview of the Rule and related amendments.
Federal Regulators Update Senate, House on Pandemic Impact
On November 10, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a virtual hearing entitled “Oversight of Financial Regulators” to provide a six-month update on the state of the banking systems, the impact of the COVID-19 pandemic on financial institutions, and support for small business owners in communities of color. Read the LenderLaw Watch blog for a summary of what was discussed.
Five Federal Financial Agencies Propose Rule to Clarify Role of Supervisory Guidance
On November 5, the Federal Register published five federal financial regulatory agencies’ invitation for comment on a notice of proposed rulemaking (NPR) that would codify the agencies’ Interagency Statement Clarifying the Role of Supervisory Guidance, as amended, which was issued on September 11, 2018 (2018 Statement). The 2018 Statement reaffirmed the agencies’ understanding that they “do not take enforcement actions based on supervisory guidance.” Read the LenderLaw Watch blog to learn more about the proposed rule and its impact on the agencies.
Enforcement & Litigation
Maryland AG Settles with Student Loan Debt Buyer for $2.6M
On November 16, the Maryland Attorney General (Maryland AG) announced a settlement with a Texas-based debt buyer regarding a portfolio of student loan debt the buyer purchased from a court-appointed receiver following the closure of a for-profit college. Read the Consumer Finance Enforcement Watch blog to learn more about the settlement.
Goodwin News
10 Key Takeaways From California’s New Consumer Finance Regulatory and Enforcement Regime
Three California laws that affect fintech companies will go into effect on January 1, 2021; the California Consumer Financial Protection Law, the Debt Collection Licensing Law and the Student Loan Borrower Bill of Rights. Goodwin’s Fintech Flash provides the key takeaways that fintech companies need to know about their “new” regulator and discusses how the three new California consumer finance laws may impact fintech companies.
Financial Services Forward Focus Webinar Series
Goodwin’s webinar series “Financial Services Forward Focus,” presented by a cross-discipline team of Goodwin lawyers, explores the topics that are most relevant for the financial services industry in a challenging market. From changing regulatory guidelines to fintech, mergers and acquisitions and corporate social responsibility, Goodwin will take attendees through these topics and provide guidance to help you navigate the current market conditions. Please visit the web page for more information and to access recordings and resources from previous sessions, or learn more about the latest webinars below.
Past Webinars
Capital Markets (November 18) | Our panelists discussed the current state of the capital markets across the financial services and fintech sectors, and share their insights into what’s next in light of the COVID-19 pandemic, the U.S. Presidential election and stimulus discussions.
Boston Bar Association Virtual Privacy & Cybersecurity Conference
The Boston Bar Association’s upcoming Privacy & Cybersecurity Conference has been adapted to a virtual format and will feature live and on-demand content curated and presented by top privacy, cybersecurity and digital law practitioners and industry experts. Goodwin is a sponsor of this virtual event.
This week’s Roundup contributors: Josh Burlingham, Alex Callen, Laura Craven, Amelie Hopkins, Stephen Kim, and Tierney Smith.