Weekly RoundUp
July 26, 2017

Financial Services Weekly News

Going Strong to the Mic. The Office of the Comptroller of the Currency’s (OCC) proposed special purpose nondepository national bank charter for Fintech companies (Fintech Charter) has long been the source of controversy, drawing criticism from Congress and spawning litigation from the Conference of State Bank Supervisors (CSBS) and the New York State Department of Financial Services (NYSDFS). While the Fintech Charter was supported by former Comptroller Tom Curry, there was a question as to whether the Trump administration would continue to support the initiative. On July 19, in a speech to the Exchequer Club in Washington, DC, Acting Comptroller of the Currency Keith Noreika definitively answered the question in the affirmative. In his remarks, Mr. Noreika roundly stated that the Fintech Charter is a “good idea” and flatly stated that the OCC has the authority to grant the Fintech Charter in the face of the legal challenges by the NYSDFS and CSBS. The Acting Comptroller also stated that “hundreds of fintechs presently compete against banks without the rigorous oversight and requirements facing national banks and federal savings associations” and that “the supervision that accompanies becoming a national bank would help level the playing field in meaningful ways.” While Mr. Noreika made it clear that the OCC has “not received, nor [is it] evaluating, any such applications from nondepository fintech companies,” he said that the OCC “will continue to hold discussions with interested companies while [it] evaluate[s its] options” and that the OCC’s existing charters may be an option for Fintech companies right now. For additional information, view the Digital Currency and Blockchain Perspectives blog post.

Regulatory Developments

House of Representatives Votes to Repeal CFPB’s Arbitration Rule Under Congressional Review Act

As previously reported by LenderLaw Watchand the Roundup, the Consumer Financial Protection Bureau (CFPB) has released its Arbitration Rule, which blocks the use of mandatory arbitration clauses in consumer financial products and services contracts that prohibit class action lawsuits. As predicted, the Rule has been met with staunch opposition by various individuals and groups seeking to prevent the Rule from becoming effective. Congress now has begun the process of overturning the Rule. The House of Representatives voted to repeal the Rule on July 25 on a largely party-line vote. The Rule’s fate now rests with the U.S. Senate, where Banking Committee Chairman Mike Crapo (R-ID) along with 23 other Republican senators filed a Congressional Review Act Joint Resolution of Disapproval on July 20. For additional information about the Rule, view the LenderLaw Watch blog post.

Federal Regulatory Agencies Announce Coordination of Reviews for Certain Foreign Funds under “Volcker Rule”

On July 21, the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Federal Deposit Insurance Corporation (FDIC), the OCC, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission announced that they are coordinating their respective reviews of the treatment of certain foreign funds under Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, and the agencies’ implementing regulations. While these foreign funds are investment funds organized and offered outside of the United States that are excluded from the definition of “covered fund” under the agencies’ implementing regulations (“foreign excluded funds”), complexities in the statute and the implementing regulations may result in certain foreign excluded funds becoming subject to the Volcker Rule because of governance arrangements with or investments by a foreign bank. The staffs of the agencies are considering ways in which the implementing regulations may be amended, or other appropriate action may be taken. To aid full consideration, the Federal Reserve Board, FDIC and OCC announced that they would not take action under the Volcker Rule for qualifying foreign excluded funds, subject to certain conditions, for a period of one year.

Fed Seeks Comments on Proposed Reporting Changes for BHCs

The Federal Reserve Board is seeking comments on a proposal to revise certain reports required to be filed by bank holding companies with more than $1 billion in assets. Specifically, the Federal Reserve Board proposes to implement a number of revisions to the FR Y–9C reporting requirements, most of which are consistent with changes to the Call Report (which were effective March 31, 2017). These proposed changes include the elimination of several data items and streamlined questions for reporting on complex or specialized activities. Additionally, the Federal Reserve proposes to eliminate the concept of extraordinary items on various reports, add one new item to the FR Y–9SP report, and revise the instructions to clarify the reporting of certain tax benefits on various reports. These changes would be effective for reports submitted on or after October 1, 2017, beginning with the reports reflecting the September 30, 2017, report date. Comments are due September 18, 2017.

Agencies Propose Rule to Exempt Certain Commercial Real Estate Transactions from Appraisal Requirements

On July 19, the Federal Reserve Board, the FDIC and the OCC issued a notice of proposed rulemaking to increase the threshold for commercial real estate transactions requiring an appraisal from $250,000 to $400,000. The agencies believe that raising the threshold will not pose a threat to the safety and soundness of financial institutions but will “significantly reduce” the number of required appraisals. In place of appraisals, financial institutions will be required to obtain an evaluation for transactions at or below the threshold. An evaluation provides a market value estimate of the pledged real estate, is less detailed than an appraisal, and does not need to be completed by a state licensed appraiser. Comments will be accepted for 60 days from publication of the proposed rule in the Federal Register.

Recent Cases Demonstrate Need for Blockchain

A recent Delaware bill is poised to allow private Delaware corporations to “use networks of electronic databases (examples of which are described currently as “distributed ledgers” or a “blockchain”) for the creation and maintenance of corporate records, including the corporation’s stock ledger.” The bill is a significant step toward the mainstream adoption of blockchain technology, which has the potential to solve problems that legacy technologies could not previously solve. View the Digital Currency and Blockchain Perspectives blog post.

Enforcement & Litigation

Registered Investment Adviser Offers to Settle Charges Resulting from Failing to Disclose Conflict of Interest Arising from Revenue Sharing Arrangement and Failure to Seek Best Execution

On July 19, KMS Financial Services, Inc. (the Adviser) offered to settle charges that it failed to disclose to its advisory clients that it received revenue from a third-party broker-dealer and the resulting conflict of interest, and that it failed to seek best execution for advisory clients. The SEC alleged that the Adviser failed to disclose to clients that it participated in a program offered by its clearing broker whereby the broker agreed to share revenue it received from certain mutual funds with the Adviser, creating a conflict of interest because of the financial incentive for the Adviser to favor the mutual funds in the program over other investments. The SEC also alleged that in 2014, the Adviser, a dually-registered investment adviser and broker-dealer, negotiated a $1 per trade reduction in the clearance and execution costs charged by the clearing broker when the Adviser acted as introducing broker. The SEC alleged that the Adviser continued to charge advisory clients the same overall brokerage commission and did not pass the cost reduction on to its advisory clients, and did not consider whether advisory clients continued to receive best execution in light of the increased portion of the charges the Adviser kept. The SEC alleged that these activities violated Sections 206(2), 206(4), and 207 of the Investment Advisers Act of 1940, and Rule 206(4)-7 thereunder. Without admitting or denying the allegations, the Adviser consented to a censure, a cease-and-desist order from committing or causing further violations of these provisions, and the payment of disgorgement of approximately $382,568 plus prejudgment interest, and a $100,000 penalty.

CFPB Publishes State-by-State Snapshot of Consumer Complaints

On June 27, the CFPB published a state-by-state breakdown of consumer complaints that have been filed with the CFPB. The snapshot—which is contained in the June 2017 edition of the CFPB’s Monthly Complaint Report—compiled data from the CFPB’s Consumer Complaint Database about the number of consumer complaints submitted, as well as the products and issues about which consumers complain most and how often companies provided timely responses to the complaints. The snapshot also reports data about complaints made by various specific populations, such as service members and older consumers. The data is generated across all 50 states and the District of Columbia and spans from the time the CFPB began handling consumer complaints in July 2011 until June 1, 2017. View the LenderLaw Watch blog post.

Second Circuit Holds That Contractually Given Consent Cannot Be Revoked Under TCPA

On June 22, the Second Circuit decided Reyes v. Lincoln Automotive Financial Services, No. 16-2104—a decision which is a win for the Telephone Consumer Protection Act (TCPA) defense bar. In Reyes, the Second Circuit held that, once a consumer consents to be contacted as part of a valid contract, the consumer may not unilaterally revoke that consent and bring an action under the TCPA if he or she continues to be contacted by the other contracting party. View the LenderLaw Watch blog post.

Goodwin News

Mortgage Bankers Association Webinar: Supreme Court & Appellate Court Update – Year in Review – August 29

At a time of substantial regulatory action in the area of consumer financial protection, there has also been significant judicial activity. Hear from legal experts as they examine and discuss recent major decisions at the Supreme Court and appellate courts which will affect consumer protection generally and impact the mortgage finance arena specifically. Please join MBA Compliance Essentials for an important, informative program on the current state of consumer protection law, as well as what might be coming from the courts in the not too distant future. Goodwin partners Willy Jay, Matthew Sheldon and Laura Stoll will be speaking at this webinar.

This week’s Roundup contributors: Courtney Hayden, Bill McCurdyGeorge Schneider and Alyssa Sussman.