Weekly RoundUp
June 29, 2016

Financial Services Weekly News

Brexit Stage Left. As the global economy continues to absorb the shockwaves of last week’s UK referendum vote, the long and arduous process of negotiating Britain’s departure from the EU and disentangling the UK’s economy, politics, laws and regulations from the EU has yet to begin. On the other side of the pond, a very active SEC issued updated guidance for registered investment companies, proposed a new rule requiring investment advisers to adopt business continuity and transition plans, and proposed amendments to the current definitions of “smaller reporting company.” The CFPB released findings that mortgage servicers’ use of failed technology triggered rule violations, and the U.S. Supreme Court decided against reviewing Madden v. Midland Funding LLC. These and other developments are covered below.

Regulatory Developments

FSOC Rescinds GE Capital's SIFI Designation

On June 29, the Financial Stability Oversight Council (FSOC) announced that it had voted unanimously to “rescind its determination that material financial distress at GE Capital Global Holdings, LLC (GE Capital) could pose a threat to U.S. financial stability and that GE Capital should be subject to supervision by the Board of Governors of the Federal Reserve System and enhanced prudential standards.” It was the first time that the FSOC had voted to rescind a company’s SIFI designation. The April 6 edition of the Roundup had previously reported that GE Capital had applied for rescission of its SIFI designation after taking “affirmative steps” that “substantially reduced its risk profile” and made the firm “significantly less interconnected to the financial system.” Treasury Secretary Jacob J. Lew said “Today’s decision clearly demonstrates that the [FSOC’s] designation of nonbank financial companies is a two-way process. The [FSOC] will remove a designation when that company no longer poses risks to U.S. financial stability.” In what could be perceived as a shot at MetLife’s lawsuit challenging its SIFI designation, Secretary Lew added that “the [FSOC] follows the facts: When it identifies a company that could threaten financial stability, it acts; when those risks change, the [FSOC] also acts.”

SEC Staff Issues IM Guidance Update on Business Continuity Planning for Registered Investment Companies

On June 28, the staff of the SEC’s Division of Investment Management issued IM Guidance Update No. 2016-04 regarding business continuity planning for registered investment companies. Citing to Hurricanes Katrina and Sandy and, more recently, the August 2015 systems malfunction at a financial institution that prevented it from calculating accurate net asset values for hundreds of mutual funds and exchange-traded funds, the guidance emphasizes the importance of mitigating operational risks related to significant business disruptions through proper business continuity planning (BCP). Based on its outreach to a number of fund complexes and their advisers, the staff lists in its guidance notable practices that it observed, including: (1) plans that cover facilities, technology/systems, employees, and activities conducted by the adviser and any affiliated entities, as well as dependencies on critical services provided by third-party service providers; (2) involvement by a broad cross-section of employees from key functional areas; (3) service provider oversight programs that involve a fund’s chief compliance officer (CCO) and/or the CCOs of other entities in the fund complex and that incorporate initial and ongoing due diligence processes; (4) BCP presentations to fund boards of directors given by the adviser and/or other critical service providers, with CCO participation, on an annual basis; (5) annual testing of the BCP; and (6) monitoring by the CCO and other pertinent staff of business continuity outages, which are reported to fund boards as warranted.

The guidance also lists a number of “lessons learned” from past business continuity events and its outreach efforts, including the importance of: (1) examining critical service providers’ backup processes and redundancies, the robustness of the providers' contingency plans and how the providers intend to maintain operations during a significant business disruption; (2) monitoring to determine whether a critical service provider has experienced a significant disruption and establishing communication protocols and steps to successfully navigate such events; (3) understanding the interrelationship of critical service provider BCPs; and (4) contemplating various critical service provider disruption scenarios and developing a plan for managing the response to potential disruptions. The staff noted that, because fund complexes vary in activities and operations, BCPs should be tailored based on the nature and scope of their business.

SEC Proposes Rule Requiring Investment Advisers to Adopt Business Continuity and Transition Plans

Continuing its focus on business continuity, on June 28, the SEC proposed a new rule that would require registered investment advisers to adopt and implement written business continuity and transition plans. According to the SEC, the proposed rule is designed to ensure that investment advisers have plans in place to address operational and other risks related to a significant disruption in the adviser’s operations.

The proposed rule would require investment advisers to tailor a plan based on particular risks associated with the adviser’s operations and include policies and procedures addressing the specified components, including: maintenance of systems and protection of data; pre-arranged alternative physical locations; communication plans; review of third-party service providers; and a transition plan in the event the adviser is winding down or is unable to continue providing advisory services. The proposed rule and rule amendments also would require advisers to review the adequacy and effectiveness of their plans at least annually and to retain certain related records. The comment period will be 60 days after publication in the Federal Register.

SEC Proposes Amendments to Smaller Reporting Company Definition

On June 27, the SEC proposed amendments to the current definitions of “smaller reporting company” that would significantly increase the public float threshold for eligibility to use the scaled disclosures applicable to smaller reporting companies. The SEC has not proposed to increase the current $75 million threshold in the “accelerated filer” definition. As a result, companies with $75 million or more of public float that would qualify as smaller reporting companies would nevertheless be subject to the requirements that apply currently to accelerated filers, including (1) the timing of the filing of periodic reports and (2) the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal controls over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. Comments are due 60 days after publication in the Federal Register.

OCC Hosts Forum on Responsible Innovation

On June 23, the Office of Comptroller of the Currency (OCC) hosted a daylong forum on “Supporting Responsible Innovation in the Federal Banking System.” The purpose of the forum was to create a dialogue among government representatives, banks, Fintech companies, and other stakeholders about what kind of framework the OCC should adopt to encourage responsible innovation and provide guidance and oversight over the growing financial technology space. The subject of the OCC possibly creating a limited-purpose charter adapted to the unique business of Fintech companies was raised several times. While the OCC reaffirmed that the idea was under active discussion and consideration, it also stressed the sanctity of the national bank charter, the requirement of a real need and public purpose before granting a charter, and that a limited charter would not mean lighter supervision. During the forum, the OCC also emphasized its desire to maintain an open dialogue with all stakeholders, and provide a safe space for banks, Fintech companies, and other participants in the industry to turn to for guidance and the rules of the road. The OCC discussed the possibility of pilot programs, though noted that it would be difficult for the regulators to provide a safe harbor or free pass where the potential for consumer harm is involved. The forum also included further discussion on the role of financial technology in closing the gap for unbanked and underbanked populations, whether existing guidance on third-party vendor relationships should be revisited for Fintech partnerships, and the possibility of providing Community Reinvestment Act credit as a means to encourage responsible innovation, among other topics.

CFPB Supervision Finds Mortgage Servicers’ Ongoing Technology Failures and Process Breakdowns Trigger Rule Violations

On June 22, the Consumer Financial Protection Bureau (CFPB) released a special edition supervision report that focused specifically on mortgage servicers between January 2014 and April 2016. The report found that several mortgage servicers are still using failed technology, which has resulted in substantial harm to consumers, in violation of the CFPB’s new servicing rules. Specifically, examiners observed problems associated with loss mitigation and servicing transfer. They noted that information about loan modifications was late, incorrect, or deceptive due to technological breakdowns or malfunctions and that consumers got the runaround when loans transferred to a new servicer with an incompatible computer system. As a result, in addition to the report, the CFPB released a third update to its mortgage servicing exam manual. In particular, mortgage servicers should note a greater emphasis in exams on complaint handling and requests by troubled borrowers and discrimination issues.

FINRA Proposes to Renumber NASD Rule 2830 (Investment Company Securities) as FINRA Rule 2341

On June 22, FINRA announced that it had filed a proposed rule change to adopt NASD Rule 2830 (Investment Company Securities) as FINRA Rule 2341 (Investment Company Securities) in the consolidated FINRA rulebook without any substantive changes. FINRA also proposes to update cross-references within other FINRA rules accordingly. The rule change was filed for immediate effectiveness. In the SEC release, the SEC invited comments on the proposal, which are due 21 days after publication in the Federal Register.

FINRA Files Clarifying Amendments to Rule 2210 (Communications With the Public) Relating to Debt Research Reports

On June 24, FINRA filed with the SEC amendments to Rule 2210 (Communications with the Public) conforming it to new FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports). The changes clarify how the supervisory approval requirements of Rule 2210 apply to retail communications that are also research reports under Rule 2241, applicable to equity research analysts and equity research reports, or debt research reports under Rule 2242, and subject to supervisory approval under those rules. The amendments would also extend to debt research reports and appearances by debt research analysts the current exception to the disclosure requirements of Rule 2210 applicable to equity research reports and public appearances by equity research analysts. FINRA filed the proposed rule change for immediate effectiveness and requested that the SEC waive the requirement that the proposed rule change not become operative for 30 days after the date of the filing so that the implementation date for the proposed rule change will be July 16, 2016, to coincide with the effective date of FINRA Rule 2242.

Enforcement Litigation

U.S. Supreme Court Will Not Hear Madden v. Midland Funding

On June 27, the U.S. Supreme Court (the Court) decided not to review Madden v. Midland Funding LLC. As reported in the May 25 edition of the Roundup, the U.S. Solicitor General had recommended that the Court deny a writ of petition of certiorari to hear the case. As a result of the decision, secondary market demand for marketplace loans with interest rates above state usury limits in Second Circuit states could remain low. It is possible marketplace lenders may decide to stop making loans with rates above such limits or explore other arrangements that present less risk, such as participation structures.

Goodwin News

Your Roundup Looks Different: Goodwin Procter Rebrands as Goodwin

We are delighted to announce the launch of our new brand and website, www.goodwinlaw.com, along with the relocation of our Boston office. For more information, please click here.

23rd Annual ABI Northeast Bankruptcy Conference

Bill Weintraub, partner in Goodwin's Financial Institutions Group and co-chair of its Financial Restructuring Practice, will be speaking at the 23rd Annual ABI Northeast Bankruptcy Conference, July 14-16 in Bretton Woods, NH, on a panel to discuss "Cutting Edge Chapter 11 Plan Issues.”

ACI's 20th Directors & Officers and Management Liability Conference

On July 26, ACI will host its 20th National Forum on Directors & Officers and Management Liability, a premier event for leading brokers, underwriters, claims professionals and attorneys to benchmark coverage, underwriting and claims strategies. The event will offer practical and detailed analysis of the entire D&O and Management Liability landscape, including the impact of litigation, regulatory action, and market conditions in today’s tumultuous environment. Business Litigation partner Carl Metzger, head of the firm's Insurance & Risk Management Practice, will be moderating a panel titled, “Identifying, Acquiring and Evaluating D&O Policies.” For more information, click here.

ACI's 13th National Forum on Cyber & Data Risk Insurance

On July 28, ACI will host the 13th installment of its Cyber & Data Risk Insurance conference. Hear from high-level faculty about advancements in technology, products, pricing, coverage options, prevention strategies and more. Learn from and network with industry leaders about the right coverage options for your company and how you can protect data from financial and reputational loss. Business Litigation partner Carl Metzger, head of the firm’s Insurance & Risk Management Practice, will be moderating the panel discussion, “Identifying, Acquiring and Evaluating Cyberliability Insurance.” For more information, click here.