Weekly RoundUp
August 23, 2017

Financial Services Weekly News

DOJ Emphatically Ends Operation ChokepointAfter four years, the Department of Justice (DOJ) announced the formal end of its controversial Operation Chokepoint initiative. Launched in 2013, Operation Chokepoint investigations focused on financial institutions that provided services to businesses ostensibly subject to a high risk of fraud or money laundering. Critics argued that the initiative had little to do with combatting fraud or money laundering but was designed to “choke off” the oxygen (money) to lawful industries disfavored by the Obama administration. The initiative’s future has been in doubt ever since the Federal Deposit Insurance Corporation (FDIC) was forced to withdraw guidance on “high risk” industries previously issued in connection with Operation Chokepoint, so the formal termination of the initiative by the Trump administration is not a surprise. However, the language used by the DOJ in announcing the initiative’s termination was emphatic. In its letter to the House Judiciary Committee announcing the termination of Operation Chokepoint, the DOJ referred to Operation Chokepoint as a “misguided initiative conducted by the previous administration” and stated that the DOJ shared the Committee’s view that “law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor.” The letter went on to state that the DOJ “is committed to bringing enforcement actions only where warranted by the facts and the applicable law, without regard to political preferences” and that it “will no longer discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearm related activities.” The letter is further evidence that new personnel, their approach to regulation and their view on the limits of governmental power (not Congressional action or the formal repeal of regulations) are likely to be the primary drivers of financial regulatory reform.

Please note: The Roundup will be on hiatus through Labor Day, and will resume publication on September 13. We wish all of you a relaxing Labor Day weekend and a successful back-to-school season.

Regulatory Developments

Federal Banking Agencies Delay Transition to Basel III Capital Framework for Banks Not Using Advanced Approaches

On August 22, the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC) and the FDIC issued a proposed rule that would delay the transition to the Basel III capital framework for banks not using the Basel III advanced approaches. “As part of the recent review of regulations under the Economic Growth and Regulatory Paperwork Reduction Act, the agencies announced that they are developing a proposal that would simplify the capital rules to reduce regulatory burden, particularly for community banks,” the agencies said. “That proposal would simplify the capital rules’ treatment of mortgage servicing assets and other items. However, under the current capital rules, the transitional treatment for those items is scheduled to be replaced with a different treatment on January 1, 2018.” The proposed rule would extend the existing transitional capital treatment for certain regulatory capital deductions and risk weights and delay the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests pending a new rulemaking addressing these topics. Because advanced approaches are principally used by banking organizations with over $250 billion in assets or foreign bank subsidiaries with over $10 billion in assets, the delay would apply to all community and midsized banks. Comments on the proposed rule will be accepted for 30 days after publication in the Federal Register.

FINRA Proposes to Apply Pay-to-Play Rules to CABs

On August 17, the Financial Industry Regulatory Authority (FINRA) filed with the Securities and Exchange Commission (SEC) proposed amendments to the Capital Acquisition Broker (CAB) Rules that would apply FINRA Rule 2030, the Pay-to-Play Rule, and Rule 4580, providing record-keeping requirements related to the Pay-to-Play Rule, to CABs. The CAB rules, 203 and 458, would provide that all CABs are subject to FINRA Rules 2030 and 4580. This change, in addition to imposing limitations on the ability of CABs to make political contributions to the officials of government entities with whom they do business, will enable investment advisers to pay CABs for soliciting government entities to become investors in collective funds. SEC Rule 206(4)-5, addressing the pay-to-play practices of investment advisers, among other things prohibits an investment adviser from providing payments to any person to solicit a government entity for investment advisory services on behalf of the investment advisory unless the person is a “regulated person.” The term “regulated person” is defined for purposes of this prohibition to include a FINRA member subject to rules that impose substantially similar or more stringent restrictions than those imposed by Rule 206(4)-5. FINRA Rule 2030, which imposes substantially similar standards to Rule 206(4)-5, became effective on August 20. As noted in the article below (“SEC Provides Guidance Delaying Application of SEC Pay-to-Play Rule on CABs until Effectiveness of FINRA’s CAB Rules 203 and 458”), guidance published by the SEC will permit investment advisers to make payments to CABs for soliciting government entities in the interim period until the effective date of CAB Rule 203 and 458. Comments on the rule proposal are due 21 days after publication in the Federal Register.

SEC Provides Guidance Delaying Application of SEC Pay-to-Play Rule on CABs until Effectiveness of FINRA’s CAB Rules 203 and 458

On August 18, the SEC updated its Responses to Questions About the Pay-to-Play Rule to add question and answer 1.5, providing that, until the effective date of any rules subjecting CABs to the FINRA pay-to-play rules, the Division of Investment Management will not recommend enforcement action to the Commission against an investment adviser or its covered associates under Rule 206(4)-5(a)(2)(i) for payment to any person that is a CAB to solicit a government entity for investment advisory services on behalf of the investment adviser or its covered associates. See the related article above (“FINRA Proposes to Apply Pay-to-Play Rules to CABs”).

FHFA Modifies High LTV Streamlined Refinance Program and Extends HARP

On August 17, the Federal Housing Finance Agency (FHFA) announced an extension to the Home Affordable Refinance Program (HARP) through December 31, 2018. After multiple prior extensions, the HARP program was finally scheduled to sunset next month. The termination of HARP was scheduled to coincide with the planned launch of Fannie Mae and Freddie Mac’s streamlined refinance programs for borrowers with little equity in their homes. However, the FHFA decided recently that these refinance programs will only be made available to borrowers who obtained loans on or after October 1, 2017, a change which the agency stated was necessary to protect taxpayers and preserve credit loss protection objectives of a credit risk transfer program under which the GSEs have transferred a portion of risk on $1.6 trillion of unpaid principal balances. As a result of this change to the eligibility requirements of the refinance programs, the FHFA believes HARP will remain an important option for borrowers who obtained loans prior to that date. HARP has been used since 2009 to refinance more than 3.47 million mortgage loans.

Future of CFPB’s Arbitration Rule in Hands of Senate

On July 25, the U.S. House of Representatives voted to block the Consumer Financial Protection Bureau’s (CFPB) Arbitration Rule from becoming effective with a vote of 231 to 190.  The vote was mostly down party lines and paves the way for the Senate to act to impose its own legislative veto to block the Rule. As LenderLaw Watch previously reported (here and here), the CFPB’s Arbitration Rule prohibits financial institutions from including arbitration clauses precluding consumers from filing class action lawsuits in consumer financial services and products contracts. While both the U.S. House of Representatives and U.S. Senate filed Congressional Review Act challenges to the Rule, the House was the first to act. The Congressional Review Act permits Congress to effectuate a legislative veto of an agency rule, such as the Arbitration Rule, by issuing a resolution of disapproval with a simple majority vote.  5 U.S.C. § 802. House Republicans filed their Congressional Review Act challenge to the Rule on July 20, 2017, and passed its resolution of disapproval of the Rule only five days later. If not blocked, the Rule is slated to become effective on September 18, 2017. View the LenderLaw Watch blog post.

CFPB Deploys Web-Based Form for Regulatory Inquiries

On August 17, the Consumer Financial Protection Bureau (CFPB) launched a web-based input form to replace its email address (CFPB_RegInquiries@cfpb.gov), which was used for the submission of regulatory inquiries. The new form asks submitters of regulatory inquiries to identify an applicable regulation from a drop-down menu, provides space for free-form questions, and collects contact information. Submitters of questions pertaining to multiple regulations are instructed to submit them separately. The new form indicates that responses can generally be expected within 10-15 business days. The new form is available on the CFPB’s website.

OCC Issues Risk Management Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization

On August 21, the OCC issued a bulletin providing guidance for managing risks associated with programs in which residential mortgage loans are originated when the loan-to-value ratio (LTV) at origination exceeds 100 percent (higher-LTV loans). The OCC stated that it recognizes that “supporting long-term community revitalization may necessitate responsible, innovative lending strategies” and that “in some circumstances, a bank also can design a program to offer higher-LTV loans in communities targeted for revitalization in a manner consistent with safe and sound lending practices and current regulations and guidelines.” The bulletin provides guidance regarding the circumstances under which banks may establish a program to originate certain higher-LTV loans and the OCC’s supervisory considerations regarding such programs.

OCC Bank Accounting Advisory Series Updated

On August 15, the OCC released an annual update to its Bank Accounting Advisory Series (BAAS). This edition of the BAAS reflects accounting standards issued by the Financial Accounting Standards Board on topics such as the recognition and measurement of financial instruments, leases and revenue recognition. Additionally, this edition includes recent answers to frequently asked questions from the industry and examiners. The BAAS does not represent official rules or regulations of the OCC. Rather, it represents the OCC’s Office of the Chief Accountant’s interpretations of generally accepted accounting principles and regulatory guidance based on the facts and circumstances presented. National banks and federal savings associations that deviate from these stated interpretations may be required to provide justification to the OCC.

Client Alert: Revised NYSE Dividend Notification Requirements

The New York Stock Exchange has amended its Listed Company Manual to require listed companies to notify the NYSE at least 10 minutes before the company announces any dividend or stock distribution or the fixing of a record date for any dividend or stock distribution, even if the announcement is made outside of market hours. The NYSE adopted these amendments on August 14, 2017. For more information, read the client alert issued by Goodwin’s Public Companies and REITs and Real Estate M&A practices.

Enforcement & Litigation

Spokeo Resurfaces: Ninth Circuit Holds FCRA Plaintiff Has Standing to Sue

On August 15, the Ninth Circuit issued its opinion in Robins v. Spokeo, finding that plaintiff Thomas Robins has standing to continue his Fair Credit Reporting Act (FCRA) suit against Spokeo, Inc. In its opinion, a unanimous panel of the Ninth Circuit articulated a two-part concreteness test to determine standing. The court concluded that Robins’ allegations satisfied the test because the FCRA provision at issue was designed to protect a concrete interest and the alleged violation of that protection presented a material risk of harm to Robins. The court also rejected Spokeo’s argument that Robins’ injury was only speculative. The Ninth Circuit’s Spokeo decision is noteworthy not only because of the case’s protracted history in the Ninth Circuit and the Supreme Court, but because it shows the evaluation of individual claims that courts must undertake in determining whether plaintiffs have standing. View the LenderLaw Watch blog post.

Goodwin News

Goodwin Joins Ethereum Enterprise Alliance Legal Industry Working Group

Goodwin recently joined the Enterprise Ethereum Alliance (EEA) Legal Industry Working Group alongside 13 other leading law firms and academic institutions, bringing together top global law firms and leading legal minds to explore building enterprise-grade applications on Ethereum. The rapid growth of the EEA Legal Industry Working Group is emblematic of the increased interest by legal professionals in blockchain technology, and the EEA believes that the Legal Working Group will prove foundational to the success of various efforts taking place within the organization. The Enterprise Ethereum Alliance is an industry-supported, not-for-profit established to build, promote and broadly support Ethereum-based technology best practices, open standards and open source reference architectures. Formed earlier this year, the EEA is helping to evolve Ethereum into an enterprise-grade technology, providing research and development in a range of areas, including privacy, confidentiality, scalability and security. Read more about the Ethereum Enterprise Alliance Legal Industry Working Group.

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.

The Knowledge Group: Navigating SEC’s Latest Custody Rule Guidance and Its Impact on Advisers Webcast – September 15

Earlier this year, the SEC Division of Investment Management released and provided new custody rule guidance under the Investment Advisers Act of 1940. The new guidance addresses the three areas under the Custody Rule, which are the standing letters of authorization, client’s grant of authority to an adviser, and the provisions in a separate custodial agreement. In this live webcast, a seasoned panel of thought leaders, professionals and advisers assembled by The Knowledge Group will provide and present to the audience the recent trends and developments related to the latest SEC Custody Rule Guidance. Speakers will also identify how the new guidance impacts investment advisers. Jason Monfort is speaking at this webinar. For additional information, please visit the event website.

This week’s Roundup contributors: Alex Callen, Courtney Hayden, Kimberly Holzel and Bill McCurdy.