Weekly RoundUp
April 6, 2016

Financial Services Weekly News

Could Innovative Regulation be a Welcomed Development? Much has been written and said about the impact of Fintech companies on banks and the way that banks interact with customers and design and deliver their products. To date, regulators have largely left this discussion to industry participants but that is now changing. As discussed below, last week, the Office of the Comptroller of the Currency (OCC) published a whitepaper outlining an OCC initiative to encourage and embrace “responsible financial innovation” among national banks and federal savings associations, which increasingly compete with Fintech companies and similar entities operating outside the banking industry. In his remarks announcing the OCC’s innovation initiative, Comptroller of the Currency Thomas J. Curry explicitly recognized the challenges that “fintechs” pose for traditional banks, calling these challenges a “good and healthy thing.” Perhaps more interestingly, Comptroller Curry also acknowledged that the growing intersection between Fintech and banking poses challenges for bank regulators as well, stating that regulators “have to be knowledgeable enough to understand new technology and nimble enough to render timely decisions on matters requiring regulatory approval, as well as guidance about our supervisory expectations.” While history suggests that bankers often have good reason to be suspicious of new regulatory initiatives, if the OCC and other federal banking regulators really are willing to approach innovation with their “eyes wide open to the attendant risks, but also an open mind to promising new ideas and new technology,” the OCC’s innovation initiative could be a rare welcomed regulatory development.

Regulatory Developments

DOL Issues Final Fiduciary Rule

On April 6, the Department of Labor (DOL) unveiled its pre-publication final version of the long-awaited fiduciary rule (the Final Rule). Some of the more significant aspects of the Final Rule are provided in a client alert published today by Goodwin partners Scott Webster, Jamie Fleckner and Alison Douglass from our ERISA & Executive Compensation and ERISA Litigation practices.

OCC Announces Financial Innovation Initiative

On March 31, the OCC published a whitepaper outlining an OCC initiative to encourage and embrace responsible financial innovation among national banks and federal savings associations. The OCC also announced a forum on responsible innovation to be held in Washington, D.C. on June 23, 2016. The whitepaper outlines the bases and governing principles for a framework intended to improve the OCC’s evaluation of innovative financial products and services; related communication channels; related risk identification; and related regulatory approval processes. Highlights include the possibility of a centralized innovation office or unit within the OCC; pilot programs for new products; and the reevaluation of existing regulatory regimes, such as those applicable to product development and third-party risk management. Financial Institutions partner Bill Stern recently commented on OCC developments in The Boston Globe. The OCC has invited the public to comment on these topics and others identified in the whitepaper by email to innovation@occ.treas.gov by May 31, 2016.

FDIC Announces Plan to Spur De Novo Bank Formations

On April 6, at its Community Banking Conference on "Strategies for Long-Term Success," the Federal Deposit Insurance Corporation (FDIC) announced measures designed to foster more interest in new banking charters. In particular, the FDIC rescinded Financial Institution Letter (FIL) 50-2009, Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions, which had extended the period of heightened regulatory scrutiny for newly organized, state nonmember institutions from three to seven years for examinations, capital maintenance, and other requirements. The FDIC also issued a supplement to its November 2014 guidance related to the Statement of Policy on Applications for Deposit Insurance. The guidance is in a question-and-answer format to aid applicants who are developing proposals for deposit insurance. The supplemental questions and answers focus on the development of business plans. FDIC Chairman Martin J. Gruenberg said the FDIC “welcomes applications for deposit insurance."

FDIC Publishes Corporate Governance Update

On April 5, in advance of its Community Banking Conference on "Strategies for Long-Term Success," the FDIC published a special edition of Supervisory Insights, "A Community Bank Director's Guide to Corporate Governance: 21st Century Reflections on the FDIC Pocket Guide for Directors." The special corporate governance edition reviews the Pocket Guide and incorporates more recent guidance and technical resources to help board members effectively fulfill their role and duties.

GE Capital Applies to Rescind SIFI Designation

On March 31, GE Capital filed a request with the Financial Stability Oversight Council (FSOC) for rescission of GE Capital’s designation as a nonbank Systemically Important Financial Institution (SIFI). GE Capital’s application to the FSOC comes on the heels of a federal district court judge’s decision to rescind MetLife’s SIFI designation, as covered in last week’s Roundup. However, instead of challenging its SIFI designation outright, GE Capital instead took affirmative steps that “substantially reduced its risk profile” and made the firm “significantly less interconnected to the financial system” since its designation as a SIFI in 2013. As a result of these steps, GE Capital believes that it “no longer meets the criteria to be designated as a SIFI.” Because the FSOC has not detailed the specific criteria it will use when re-evaluating a SIFI, GE Capital’s filing could provide a roadmap for other firms to exit or avoid SIFI status.

SEC Chair White Emphasizes Independent Directors’ Increasing Importance in Keynote Speech

On March 29, SEC Chair Mary Jo White delivered the keynote address at the Mutual Fund Directors Forum’s 2016 Policy Conference. Noting that registered funds now hold over $18 trillion in assets and that approximately 43 percent of all U.S. households are currently invested in mutual funds, Chair White emphasized the vital role that independent directors continue to play in 2016 to serve as a check on fund management and in safeguarding shareholder interests. She noted that the asset management industry and funds have been growing and evolving rapidly and cautioned that today’s independent directors need to be vigilant in considering whether each fund is fully addressing current and potential future risks. In particular, Chair White instructed that independent directors must go “beyond generalities” and ask “specific questions” of their service providers – requesting, for example, focused information on the management of liquidity risks, business continuity plans and cybersecurity procedures. Chair White advised boards to think more broadly about the emerging problems of tomorrow and what issues they may be missing and consider whether the current board composition includes individuals with the necessary diverse skills, experience and expertise to do their jobs. While striking a softer tone at the end of her address by noting that independent directors are still responsible for oversight rather than “day-to-day management,” Chair White recognized that many of the proposed SEC rules expand boards’ responsibilities in areas from liquidity management, cybersecurity, risk management, and derivatives oversight and will potentially mature into final rules in the very near future. She welcomed input from the industry to help the SEC staff strike an appropriate balance for the board oversight role and ensure that the board is optimally protecting investors’ interests.

FinCEN Proposes to Amend Definition of Broker-Dealer in Securities to Include Funding Portals

On April 4, the Financial Crimes Enforcement Network (FinCEN) proposed to amend the Bank Secrecy Act’s (BSA) definition of “Broker or Dealer in Securities” to include funding portals that are involved in the offering or selling of crowdfunding securities pursuant to Section 4(a)(6) of the Securities Act of 1933. Currently, the BSA’s definitions of broker or dealer in securities do not include funding portals. The proposed amendment is intended to ensure that funding portals implement policies and procedures reasonably designed to achieve compliance with the BSA’s requirements, including the filing of suspicious activity reports, which are now applicable to brokers or dealers in securities. Comments on the proposed rule will be accepted until June 3, 2016.

Goodwin Procter News

Goodwin Procter Extends International Private Equity and M&A Platform into France

On April 4, Goodwin Procter announced the firm’s European expansion to Paris with the addition of a top-ranked team of French private equity and M&A lawyers. Partners Maxence Bloch, Christophe Digoy, Jérôme Jouhanneaud and Thomas Maitrejean will open Goodwin Paris following completion of their notice periods. As noted by Goodwin Chairman David Hashmall, “Goodwin’s clients are increasingly globally focused as capital today flows around the world much more freely than ever before. And as the world gets smaller, having a best-in-class French private equity platform that complements our strong offering in the U.S., the U.K. and Asia is essential for meeting our clients’ evolving dealmaking needs. We’ve found the right team for this platform in Max, Christophe, Jérôme and Thomas and we are thrilled to welcome them into the Goodwin partnership.”

Client Alert: Recent Developments in Cybersecurity: The SEC is Preparing Cases against Firms for Lack of Cybersecurity Preparedness and Phishing Attacks to Obtain Employee W2s

Two recent developments warrant reevaluating and enhancing security measures against cyber hacking. First, the SEC recently announced that it was preparing more enforcement actions against regulated firms for failing to establish proper cybersecurity to defend against cyberattacks. Second, with the pending tax deadline approaching, cybercriminals have launched numerous successful phishing attacks, obtaining thousands of employee W-2s to use them to seek fraudulent refunds from the IRS. Please see the client alert prepared by Goodwin’s Privacy & Cybersecurity practice for more information.