Regulatory Developments
Treasury Releases First Report on Core Principles of Financial Regulation
On June 12, the U.S. Department of the Treasury issued its first in a series of reports to President Trump examining the United States’ financial regulatory system and detailing executive actions and regulatory changes that can be immediately undertaken to provide financial regulatory relief. The report was required by the president’s Executive Order on “Core Principles for Regulating the United States Financial System” detailed in the February 8 edition of the Roundup. The report’s recommendations for financial regulatory reform in the banking sector include:
- Raising the stress test asset threshold from $10 billion to $50 billion and streamlining the stress test process;
- Tailoring the participation thresholds for Comprehensive Capital Analysis and Review and living will processes, while also simplifying them and making them less frequent;
- Better calibrating the Liquidity Coverage Ratio;
- Simplifying the capital regime for community banks by exempting banks with less than $10 billion from Basel III requirements and addressing problematic treatment of mortgage servicing assets and commercial real estate loans;
- Exempting all banks with less than $10 billion in assets from the Volcker Rule, while offering additional recommendations to tailor and limit its compliance impact for all banks;
- Aligning the Qualified Mortgage standard with GSE eligibility requirements;
- Modifying the ability to repay calculation to helps banks meet the needs of the self-employed and nontraditional borrowers;
- Delaying the Home Mortgage Disclosure Act data expansion; and
- Reforming the structure and limiting the supervisory authority of the CFPB.
The report indicates that the Treasury Department and the administration will begin working with Congress, independent regulators, the financial industry and trade groups to implement the recommendations advocated in the report through changes to statutes, regulations and supervisory guidance.
House Passes Financial CHOICE Act
On June 8, the House of Representatives passed the Financial CHOICE Act (CHOICE Act) on a party line vote. As described in more detail in the May 10 edition of the Roundup, the CHOICE Act would, among other things, re-name the Consumer Financial Protection Bureau (CFPB) as the Consumer Law Enforcement Agency, while making it an enforcement only agency without a supervisory function (leaving federal banking regulators to perform consumer protection supervisory functions); provide regulatory relief to community banks and those engaged in residential mortgage lending; repeal the Volcker rule, which bars proprietary trading and sponsoring and investing in covered funds; provide regulatory relief for banks that maintain a 10% leverage ratio; and fix the “true lender” issue by overturning the Second Circuit Court of Appeals’ decision in Madden v. Midland Funding. While the CHOICE Act is unlikely to pass the Senate in its current form, some targeted reforms, including regulatory relief for community-based institutions, could be enacted.
SEC Announces Co-Directors for Division of Enforcement
On June 8, the SEC announced that Acting Director of the Division of Enforcement Stephanie Avakian and former federal prosecutor Steven Peikin have been named Co-Directors of the Division of Enforcement.
OCC Issues FAQs Addressing Third-Party Relationship Risk Management
On June 7, the Office of the Comptroller of the Currency (OCC) issued 14 frequently asked questions (FAQs) regarding the OCC’s prior guidance from October 30, 2013, “Third-Party Relationships: Risk Management Guidance” (OCC Bulletin 2013-29). A number of the FAQs address how collaboration among banks and how banks’ relationships with marketplace lenders and financial technology companies (Fintechs) fit into the OCC’s third-party risk management regime. For example, the FAQs mention many advantages derived from bank collaborations but caution that a given product or service may present a different level of risk to each collaborating institution, and the OCC accordingly itemizes a number of factors each collaborating bank should consider for itself. The OCC also addresses banks’ use of reports by third parties about bank service providers, which may be considered but should not be relied upon to meet banks’ diligence and monitoring obligations, some or all of which may be outsourced under appropriate circumstances. The OCC also clarified that a technology service provider’s (TSP) reports of examination are available only to banks having contractual relationships with the TSP, and not to banks that are either considering outsourcing activities to the examined TSP or that enter into a contract after the date of examination. Further, the OCC advises banks partnering with new companies lacking track records to develop alternative evaluation rubrics and risk-mitigation plans. Despite detail in some areas, many of the OCC’s responses to specific questions are, in essence, reminders that a bank’s approach to third-party relationship risk management for bank collaborations and Fintechs must be calibrated for each relationship’s unique facts and circumstances, just like any other third-party relationship.
FDIC Adopts Guidance on Model Risk Management
On June 7, the Federal Deposit Insurance Corporation (FDIC) adopted comprehensive guidance on model risk management that previously had been issued by both the Board of Governors of the Federal Reserve System (Federal Reserve) and the OCC. The guidance is applicable to supervised banks other than those with under $1 billion in total assets, though the FDIC noted that the guidance may be applicable to some such institutions if their use of models is significant, complex, or poses elevated risk. Recognizing the frequent use of financial models and their value to financial institutions, the FDIC’s guidance focuses on ensuring that financial models are carefully developed and implemented, validated, and rigorously monitored and tested. The FDIC’s goal in issuing the guidance is to manage risk associated with fundamental model errors that produce inaccurate outputs as well as incorrect or inappropriate use of models. The guidance addresses both internally generated models and models obtained from vendors.
Basel Committee Releases FAQs on Liquidity Coverage Ratio
On June 8, the Basel Committee on Banking Supervision released a second set of Frequently Asked Questions addressing Basel III’s Liquidity Coverage Ratio (LCR) requirements, intended to provide clarification on the rule’s interpretation. The LCR requires certain banks to hold highly liquid assets relative to cash outflows over a 30-day period during a stressed scenario. The LCR generally applies to banks with more than $50 billion in assets.
Bank Director: What are the Prospects for Regulatory Reform?
Financial regulatory reform is a priority for President Donald Trump and his administration, which views burdensome and costly regulation as a significant impediment to lending and economic growth. While it is impossible to predict what the administration’s legacy will ultimately be on regulatory reform, its actions thus far with respect to regulation generally, proposals introduced in Congress by Republicans, and the president’s power to appoint agency officials may offer some clues of what’s to come. View the Bank Director article by Goodwin’s Financial Industry Practice partner Bill Stern and counsel Matt Dyckman.
Client Alert: ERISA Fiduciary Rule Impact on Unregistered Investment Funds
ERISA imposes stringent conduct standards (and potential liability) on any person who acts as a “fiduciary,” a term that includes a person who renders “investment advice” to an ERISA plan or an IRA. The DOL has issued a regulation, effective June 9, 2017, that significantly expands what constitutes “investment advice” for this purpose. This expanded scope of investment advice makes it unclear whether customary fund sponsor activities and communications in the context of marketing interests in a fund that previously were not considered to be fiduciary in nature will confer fiduciary status unless an exception applies. As a result, until there is better clarity, many fund sponsors will likely want to be able to rely on the so-called independent fiduciary exception (the IF Exception). As a practical matter, fund sponsors marketing to large plans, and IRAs and smaller plans with a professional adviser, will not be impacted by the new Fiduciary Rule by satisfying the IF Exception discussed below. However, fund sponsors that market to IRAs and smaller plans without a professional adviser will need to consider whether they will continue to market to such investors. For more information, view the client alert issued by Goodwin’s ERISA + Executive Compensation Group.
Enforcement & Litigation
District of New Jersey Dismisses FACTA Suit on Spokeo Grounds
Even a year after it issued its opinion in Spokeo v. Robins, the Supreme Court’s decision on Article III standing continues to be hotly contested. On June 6, the District of New Jersey cited Spokeo in dismissing an amended Fair and Accurate Credit Transactions Act (FACTA) case. The decision in Kamal v. J. Crew Group rejected plaintiff’s argument that the defendant’s inclusion of 10 digits of his credit card number on receipts he received from defendant caused him actual harm or the material risk of future harm. The court’s analysis in this case provides a road map for defendants seeking to dismiss similar actions. View the LenderLaw Watch blog post.
On June 5, the Federal Trade Commission (FTC) announced that a federal district court had entered its eighth order against the remaining defendants in an illegal robocall ring in which defendants promised to help consumers lower their credit card interest rates. The FTC, in conjunction with the Florida Office of the Attorney General (AG), filed a complaint against the defendants, both corporate entities and individuals, in June 2015 in the U.S. District Court for the Middle District of Florida. The complaint alleged violations of the Federal Trade Commission Act, 15 U.S.C. §§ 53(b) and 57b, and the federal Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§ 6101-6108, along with violations of similar Florida consumer protection statutes. View the Enforcement Watch blog post.
CFPB Enforcement Continues to Rise in Q1 2017 as Other Federal and State Enforcement Trend Downward
In the first quarter of 2017, Consumer Enforcement Watch tracked 46 enforcement actions taken against consumer financial service providers. This represents a slight decrease from the 50 enforcement actions taken against consumer financial service providers in Q1 of 2016. Thirty-four of the 2017 Q1 enforcement actions were settlements (with or without consent orders), while the remaining actions were court judgments, new actions and new activity in ongoing enforcement actions. View the Enforcement Watch blog post.
Car Dealership Agrees to Consent Order to Pay $5.1 Million in Debt Forgiveness
On June 2, the Florida Attorney General (Florida AG) announced that it entered into a consent order with a Florida car dealership and its president following allegations that the dealership and the individual violated the Federal Trade Commission Act and its regulations, specifically 16 C.F.R. § 255.5, and the Florida Consumer Collection Practices Act, §§ 501.204, 501.976, and 559.72. View the Enforcement Watch blog post.
Judge Denies Motion to Dismiss in Case Filed by CFPB Against Debt Relief Attorneys
On May 30, the Honorable Josephine Staton, of the Central District of California, denied a Motion to Dismiss filed by three law firms, and their principals, in a case filed by the CFPB. The CFPB sued the law firms based on their longstanding relationship with a debt relief client. The client was sued by the CFPB for violations of the Telemarketing and Consumer Fraud and Abuse Prevention Act, and the Federal Trade Commission’s Telemarketing Sales Rule, 16 C.F.R. §§ 310.4(a)(5)(i)(A), (B) (TSR). View the Enforcement Watch blog post.
Debt Collectors Win in Supreme Court Opinion on FDCPA
On May 15, the U.S. Supreme Court decided Midland Funding, LLC, v. Johnson, No. 16–348, in favor of the debt collectors involved in the case. Specifically, Justice Breyer, writing for the Court, held that the Fair Debt Collection Practices Act, 15 U. S. C. §1692 et seq., (FDCPA), which prohibits any “false, deceptive, or misleading representation,” or using any “unfair or unconscionable means” to collect, or attempt to collect, a debt, id. at §§1692e, 1692f, does not prohibit a debt collector from asserting a claim in a Chapter 13 bankruptcy that is time-barred by a statute of limitations. View the LenderLaw Watch blog post.
Goodwin News
Mark Holland, partner in the firm’s Financial Industry and Securities Litigation + SEC Enforcement practices, will be a panelist at IDC’s Webinar on Fund Industry Litigation, SEC Enforcement Activity, and Director Indemnification and Insurance. The webinar will provide fund directors with an update on the current litigation and regulatory enforcement environment and discuss the role of indemnification and insurance in protecting fund directors and their funds. For more information, please visit the event website.
DOL Fiduciary Rule: Practical Considerations Webinar – June 22
Join Goodwin for an informative webinar exploring aspects of the new DOL Fiduciary Rule. In the 60-minute program, we will discuss how we got here and what to do now (and what to hold off doing). We will also discuss the likely litigation and enforcement landscape, in both the short-term and the longer-term. To register, please click here.
Europe Money 20/20 – June 26 – 28
Money20/20 Europe is engineered to bring together all the stakeholders with a part to play in the commerce revolution: payments and financial services providers, banks and nonbanks, the mobile ecosystem, the retail industry (offline and online), marketing services and data companies, investors, advisory firms and government bodies. Money 20/20 Europe will again take place in Copenhagen. For more information, please visit the event website.
T. Rowe Price: DCIO Client Advisory Board Meeting – June 27
Alison Douglass, partner in Goodwin’s Financial Industry and ERISA Litigation practices, will be speaking at the T. Rowe Price DCIO Client Advisory Board Meeting to provide an update on fiduciary risk and active management.
This week’s Roundup contributors: Alex Callen, Jack Raffetto, and Amanda Russ.