Federal Financial Regulators Propose to Simplify Volcker Rule
The Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) (collectively, the Agencies) have requested comments on a proposed rule to simplify and tailor compliance requirements relating to Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the “Volcker Rule.” By statute, the Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds.
The proposed changes would tailor the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities. Specifically, banks with trading assets and liabilities of more than $10 billion, referred to as “significant” trading activities, would face the strictest compliance regime, including the six-pillar compliance program specified in the 2013 final rule. Banks with trading assets and liabilities between $1 billion and $10 billion, referred to as “moderate” trading activities, would be permitted to establish a simplified compliance program that includes CEO attestation. Banks with trading assets and liabilities of less than $1 billion, referred to as “limited” trading activities, would have a rebuttable presumption of compliance with the Volcker Rule.
In addition to tailoring compliance requirements based on the level of trading activities, the proposed rule would:
- Provide more clarity by revising the definition of “trading account” in the rule, in part by relying on commonly used accounting definitions;
- Clarify that firms that trade within appropriately developed internal risk limits are engaged in permissible market making or underwriting activity;
- Streamline the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition;
- Limit the impact of the Volcker Rule on the foreign activity of foreign banks;
- Clarify activities connected to organizing or offering a covered fund; and
- Simplify the trading activity information that banking entities are required to provide to the agencies.
Finally, noting the amendments to the Volcker Rule included in the recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act (discussed above), the Agencies noted that they “plan to address these statutory amendments through a separate rulemaking process” but that “in the interim between enactment and the adoption of implementing regulations, the Agencies will not enforce the 2013 final rule in a manner inconsistent with [S. 2155].”
Comments to the proposed rule will be accepted for 60 days after publication in the Federal Register.
The SEC announced that, at its closed meeting on June 4, it voted to adopt new rule 30e-3 and requested public comments on enhancing fund disclosures and processing fees intermediaries charge for delivering fund materials to shareholders. The SEC’s new rule 30e-3 allows mutual funds to satisfy their obligations to shareholders by making shareholder reports and other required materials public at a specified website address beginning in January 2021. Funds still will be required to send shareholders via mail a paper notice of each report’s availability and will also be required to send paper copies of the reports to shareholders who prefer to receive those versions. The SEC also requested public comments on other ways to modernize fund disclosures. Specifically, the SEC requested comments regarding (1) how to improve the design, delivery, and content of fund disclosures and (2) how the current framework where intermediaries distribute fund disclosure materials to investors affects funds and investors. The public comment period will remain open until October 31, 2018.
On June 4, Jelena McWilliams was sworn in as Chairman of the FDIC for a five-year term and for a six-year term as a member of the FDIC’s board of directors. Ms. McWilliams had been confirmed by the U.S. Senate by a bipartisan vote of 69 to 24 on May 24. Ms. McWilliams was most recently Executive Vice President and General Counsel at Fifth Third Bank and previously served as Chief Counsel and Deputy Staff Director at the Senate Banking Committee under former Chairman Richard Shelby (R-Ala.). With her confirmation, the heads of all three federal banking agencies and the Consumer Financial Protection Bureau (CFPB) have been appointed by President Trump.
The OCC released its Semiannual Risk Perspective Report (Report) on May 24, focusing on risks posed by rising interest rates, cyber threats, and money laundering. Although the Report acknowledges that the federal banking system remains strong, with improved financial performance in 2017 compared to 2016, it focused on the uncertainty of how rising interest rates will affect bank deposits. In particular, the Report states that it is still unknown whether the rising interest rate environment will result in unexpected adverse shifts in liability mix or increasing costs that may adversely affect earnings or increase liquidity. The OCC also expressed concern with the continued elevation of operational risks as banks adapt to new and sophisticated technology and cyber threats. An increase in evolved cyber threats and reliance on third-party relationships have placed increasing pressure on banks to continue to modify business models, transform technology and operating processes, and respond to advanced cyber threats. Finally, the Report explained that compliance risk remains a high concern as banks continue to manage money-laundering risks and implement changes to policies and procedures to comply with challenging consumer protection requirements. Among these are the Bank Secrecy Act requirements, anti-money laundering compliance risk management systems, Office of Foreign Assets Control sanctions and the amended regulations implementing HMDA, the Military Lending Act, and TILA and RESPA. The Report provides a thorough discussion of the current economic environment, interest rate analysis, bank performance, and trends and special topics in risk.
The FDIC and the OCC are hosting the 2018 Joint Mutual Forum in Washington, DC, on Wednesday, July 25, 2018. The intent of the forum is to promote the operations of mutual depository institutions and discuss industry trends. Attendees will have the opportunity to meet with executives from other mutual organizations, as well as hear from senior management of the FDIC and the OCC. Registration information can be found here.
On May 24, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). While principally aimed at easing the regulatory restrictions applicable to community and regional banks, certain provisions of the Act are intended to encourage capital formation. Specifically, Section 507 of the Act directs the SEC to increase, within 60 days, the threshold for providing additional disclosure to employees under Rule 701 of the Securities Act of 1933, as amended (the Securities Act) from aggregate sales of $5 million in any 12-month period to $10 million. Additionally, Section 507 of the Act calls for inflation adjustment of the aggregate sales price threshold every five years. For more information, read the client alert issued by Goodwin’s ERISA + Executive Compensation practice.
Enforcement & Litigation
This past week was a busy one for state securities regulators, the CFTC and the SEC as they continue their focus on rooting out fraud from the digital currency space and crypto- and blockchain-based ventures. Noteworthy developments included (1) the North American Securities Administrators Association (NASAA) announcing a “cryptosweep” – a coordinated series of enforcement actions by state and provincial securities regulators in the U.S. and Canada to crack down on fraudulent Initial Coin Offerings (ICOs) and cryptocurrency-related investment products; (2) SEC Chairman Clayton applauding these efforts by the states; (3) the SEC launching a fake “Howey Coins ICO” webpage to educate investors on the risks of purchasing ICO coins; (4) CFTC and NASAA signing an information sharing agreement; (5) CFTC Chairman Giancarlo speaking at the NASAA Fintech Forum in Washington, DC; and (6) CFTC guidance issued to CFTC-registered exchanges and clearinghouses with respect to listing digital currency derivative products like bitcoin futures. View the Digital Currency + Blockchain Perspectives blog post.
On May 15, the United States Court of Appeals for the Third Circuit issued an important decision regarding the statute of limitations under the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, et seq. In Rotkiske v. Klemm, No. 16-1668 (3d Cir. May 15, 2018), on appeal from the Eastern District of Pennsylvania, the Third Circuit held that the FDCPA’s statute of limitations is not subject to a discovery requirement. Instead, adopting the plain meaning of the statute, the Court, in an opinion written by Judge Thomas Hardiman, held that the one-year limitations period begins to run when the alleged violation occurs. The Court noted, however, that equitable tolling may apply in certain circumstances. This decision creates a split among the circuit courts, as the Ninth and Fourth Circuits have held that the FDCPA’s statute of limitations only begins to run when the alleged violation is discovered. View the LenderLaw Watch blog post.
On March 7, the Virginia Attorney General’s Office (Virginia AG) filed a complaint against two related loan companies and their owner (the “Defendants”) in Virginia state court. According to the complaint, the Defendants engage in the practice of purchasing portions of Virginia citizens’ pension payments in exchange for a lump sum, often a few thousand dollars. The Virginia AG alleges that this “purchase” is actually an installment loan disguised as a sale. View the Enforcement Watch blog post.
There has been lots of buzz about the EU General Data Protection Regulation (GDPR), which entered into full force on May 25. The GDPR will significantly reshape the global data protection landscape for businesses that process EU personal data, adding new data breach reporting obligations and imposing extensive record keeping and vendor management rules. After all the preparation, prognostications and cautionary tales, what impact will the GDPR really have on data privacy and cybersecurity? Goodwin invites you to join us in London for a panel discussion featuring top privacy and cybersecurity experts – including Bruno Gencarelli, Head of International Data Flows and Protection for the European Commission, and Stephen McCartney, EU Director of Privacy for Pearson plc, along with members of Goodwin’s global Privacy & Cybersecurity team. Topics will include: How ready are the regulators? Is “substantial” compliance good enough? Will the enforcers tread lightly or carry a big stick? What steps do you take when you’ve had a breach? Will there be an EU-UK Privacy Shield, and what’s next for cross-border transfers? For more information or to register for this event, please click here.
Yahoo Finance is holding its fourth All Markets Summit live event on Thursday, June 14 in partnership with TechCrunch at the Nasdaq Entrepreneurial Center in downtown San Francisco. The event, similar to its February 2018 counterpart in New York, will focus entirely on cryptocurrency. Grant Fondo, partner and chair of Goodwin’s Digital Currency & Blockchain Technology practice, will be a featured speaker for a session titled “Rules and Regulations in Crypto.”
Western Bankers Association, in partnership with FHLB-SF & The Silicon Valley Center for Innovation, will hold their 2018 Fintech Symposium on July 11, 2018. Goodwin will host this event. Mike Whalen, partner and Co-Chair of Goodwin’s Fintech practice, Mitzi Chang, partner in Goodwin’s Technology Companies, Life Sciences, and Digital Currency & Blockchain Technology practices, and Bill Growney, partner in Goodwin’s Technology & Life Sciences practice, will participate on the panel.