Weekly RoundUp
November 7, 2018

Financial Services Weekly News

First Half of 2018 Sees Significant Decline in Publicly Announced or Publicly Filed Enforcement Activity.  During the first half of 2018, Enforcement Watch tracked 40 publicly announced or publicly filed enforcement actions involving consumer financial services companies. The 18 enforcement actions tracked during Q1 2018 represent a substantial decrease from the 46 actions tracked in Q1 2017. That trend continued in Q2 2018, with Enforcement Watch tracking 22 actions, compared to the 40 such actions during the same quarter last year. This overall decline in enforcement activity was anticipated in last year’s Consumer Finance Year In Review, although the extent to which activity has declined has exceeded our expectations. The majority of Q1 and Q2 actions continues to be settlements (with or without consent orders), while the remainder were court judgments, new actions, and new activity in ongoing enforcement actions.  For additional information about trends in enforcement actions, please view the Enforcement Watch blog post.

Regulatory Developments

Federal Banking Agencies Seek Comment on Tailored Application of Large Bank Capital, Liquidity, Prudential, and Other Requirements

On October 31, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), and the Federal Deposit Insurance Corporation (FDIC) published a notice of proposed rulemaking (Interagency NPR) seeking public comment on a proposal that would establish four categories of risk standards based on size, cross-jurisdictional activity, weighted short-term wholesale funding, off-balance sheet exposure, and nonbank assets, for purposes of tailoring the application of the requirements of the regulatory capital rule, the liquidity coverage ratio rule, and the proposed net stable funding ratio rule for large U.S. banking organizations with more than $100 billion in total consolidated assets. In general, the proposal is intended to alleviate regulatory burdens for institutions with less risk, while maintaining stricter requirements for those with more risk.

The Interagency NPR’s proposal is consistent with a separate notice of proposed rulemaking issued by the Federal Reserve, also on October 31 (Board NPR), seeking public comment on a proposal that would amend prudential standards for large U.S. banking organizations, including those relating to liquidity, risk management, stress testing, and single-counterparty credit limits, to reflect the risk profiles of banking organizations under each of the proposed four categories and amend prudential standards for certain large savings and loan holding companies using the same categories.

The deadline for comments on each of the Interagency NPR and the Board NPR is January 22, 2019.

Fed Finalizes SIFI Risk Rating System

On November 2, the Federal Reserve finalized a new supervisory rating scale for large bank holding companies to better harmonize the ratings system with its existing supervisory program. The rating scale applies to large bank holding companies with more than $100 billion in total assets, as well as intermediate holding companies of foreign banking organizations with more than $50 billion in assets and takes effect February 1, 2019. The Federal Reserve will assign initial ratings under the new rating system in 2019 for bank holding companies and U.S. intermediate holding companies subject to the Large Institution Supervision Coordinating Committee framework and in 2020 for all other large financial institutions. The Federal Reserve is revising provisions in Regulations K and LL so they will remain consistent with certain features of the new rating system.

Agencies Propose Rule to Update Calculation of Derivative Contract Exposure Amounts Under Regulatory Capital Rules

On October 30, the Federal Reserve, the FDIC, and the OCC jointly issued for public comment a proposal related to how firms measure counterparty credit risk for derivative contracts under the agencies’ regulatory capital rules, in order to better reflect the current derivatives market. As an alternative to the agencies’ current exposure methodology (CEM) for measuring derivative exposure, the proposal introduces the “standardized approach for measuring counterparty credit risk” (SA-CCR) and would require that all advanced approaches banking organizations (those with $250 billion or more in consolidated assets or $10 billion or more in on-balance sheet foreign exposure) use SA-CCR to calculate both standardized total risk-weighted assets and supplementary leverage ratios. Non-advanced approaches firms would be permitted to use either SA-CCR or CEM. Comments must be submitted within 60 days of publication of the proposal in the Federal Register.

Modifications to Statement of Policy for Section 19 of Federal Deposit Insurance Act

On November 1, the FDIC issued a modification to its Statement of Policy (SOP) for Section 19 of the Federal Deposit Insurance Act. Section 19 prohibits anyone convicted of any criminal offense involving dishonesty, breach of trust, or money laundering from participating in the affairs of an FDIC-insured institution without the prior consent of the FDIC. The FDIC’s recent modifications expanded the definition of de minimis offenses, for which the FDIC issues automatic consents and therefore no application is required, to include issuance of insufficient funds checks of moderate aggregate value; small dollar, simple theft; and isolated minor offenses committed by young adults. 

SEC Adopts Rules That Increase Information Brokers Must Provide to Investors on Order Handling

On November 2, the Securities and Exchange Commission (SEC) announced that it had voted to adopt amendments to Regulation National Market System (Regulation NMS) under the Securities Exchange Act of 1934 that will require broker-dealers to disclose to investors new and enhanced information about the way they handle investors’ orders. Upon request of its customer, a broker-dealer is now required to provide specific disclosures related to the routing and execution of the customer’s Regulation NMS stock orders submitted on a “not held” basis for the prior six months, subject to two de minimis exceptions. “Not held” orders are orders for which the customer gives the broker-dealer price and time discretion, in contrast to “held” orders which must be placed immediately. Although the SEC decided not to limit the disclosure requirement only to a broker-dealer’s institutional customers, one of the de minimis exceptions it provided applies to customers that trade on average less than $1 million in notional value of not held orders per month through the broker. The new disclosures will, among other things, provide the customer with information about the average rebates the broker received from, and fees the broker paid to, trading venues. The new disclosures are designed to help investors better understand how the broker-dealer routes and handles their orders and assess the impact of their broker-dealers’ routing decisions on order execution quality. The SEC also enhanced order routing disclosures that broker-dealers must make publicly available on a quarterly basis pertaining to Regulation NMS stock orders submitted on a held basis. The public disclosures must now describe any terms of payment for order flow arrangements and profit-sharing relationships, among other things. The amendments become effective 60 days from the date of publication in the Federal Register. The compliance date will be 180 days from the date of publication in the Federal Register.

Client Alert: SEC Issues New Guidance on Shareholder Proposal Exclusions Under “Ordinary Business” and “Economic Relevance” Grounds

The Division of Corporation Finance (Staff) of the SEC has issued new guidance on the ability of companies to exclude shareholder proposals from their proxy statements under the “ordinary business” and “economic relevance” exclusions of Rule 14a-8. Following on its November 2017 guidance, Staff Legal Bulletin (SLB) No. 14J provides additional information on the Staff’s views on (1) the role that a discussion of the board of directors’ analysis provides in no-action requests under the ordinary business or economic relevance exclusions, (2) how the Staff will apply the “micromanagement” doctrine in no-action requests under the ordinary business exclusion and (3) how the Staff will analyze shareholder proposals that relate to compensation matters involving senior executive officers and/or directors under the ordinary business exclusion. This new guidance appears to expand the circumstances in which the Staff will provide no-action relief for the exclusion of certain shareholder proposals, particularly those relating to compensation matters. For more information, read the client alert issued by Goodwin’s Public Companies practice.

Enforcement & Litigation

Client Alert: Another Court Partially Denies Summary Judgment, Sends Case to Trial in Section 36(b) Excessive Fee Action

On October 25, Judge George Wu of the U.S. District Court for the Central District of California in Los Angeles largely denied an investment adviser’s motion for summary judgment in an action against Metropolitan West Asset Managers (MetWest) under Section 36(b) of the Investment Company Act of 1940. The decision is notable for several reasons. First, like a decision in early October in a similar action against Calamos Advisors, the court in MetWest refused to grant summary judgment with respect to board process. Instead, that will be an issue for trial, which is scheduled for December 11, 2018. Second, the MetWest mutual fund at issue has delivered above-average performance while paying advisory fees that are at or below the median for peer funds. For more information, read the client alert issued by Goodwin’s Investment Management practice.

Online Student Loan Refinance Company Settles FTC Charges Over False Advertisements

On October 29, the Federal Trade Commission (FTC) announced that it reached a settlement agreement with an online student loan refinancer relating to charges that the company deceptively advertised inflated figures for more than two years, in violation of the FTC Act, 15 U.S.C. § 45. View the Enforcement Watch blog post.

CFPB Announces Settlement With Tennessee Small Dollar Lender

On October 24, the Consumer Financial Protection Bureau (CFPB) announced that it had entered into a Consent Order with a Tennessee-based small dollar lender, resolving allegations that the lender had committed deceptive acts and practices in violation of the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5531, 5536(a)(1)(B). The Consent Order states that between 2013 and 2016, the lender sent deceptive collection letters to thousands of borrowers threatening to take legal action with respect to debts that the lender was time-barred from enforcing. According to the CFPB, over 150 consumers responded to these letters with payment. View the Enforcement Watch blog post.

Northern District of Georgia Refuses to Strike TCPA Class Allegations Based on Supreme Court Ruling

On October 18, the Northern District of Georgia declined to extend the Supreme Court’s holding in Bristol-Myers Squibb Co. v. Superior Court of Cal., S.F. Cty. to dismiss or to strike the class allegations in a Telephone Consumer Protection Act (TCPA) case. In Dennis v. IDT Corp., the defendant argued that the inclusion of putative class members outside of the Northern District should have resulted in either dismissal of the case in its entirety or striking of the plaintiff’s class allegations. The Northern District of Georgia’s decision creates further uncertainty about how courts will view Bristol-Myers in the context of federal causes of action such as TCPA cases. View the LenderLaw Watch blog post.

Goodwin News

2018 Banking Symposium – November 29

Please join us for Goodwin’s 7th Annual Banking Symposium, a forum for CEOs and senior management to discuss emerging issues in the financial industry. This year’s symposium, Banking in a Brave New World, will feature panel discussions about the bold ways that banks are responding to the changing banking landscape, as well as political and regulatory uncertainty. This year’s keynote speaker is William Kristol, founder and editor-at-large, The Weekly Standard and political analyst, ABC News. To register for this event, please click here.

This week’s Roundup contributors:  Alex Callen, Christina Hennecken and Bill McCurdy.